SUPREME
COURT OF CANADA
Between:
Davis
& Company, a partnership
Appellant
and
3464920
Canada Inc. (formerly known as Monarch Entertainment Corporation)
Respondent
And between:
Robert
C. Strother
Appellant
and
3464920
Canada Inc. (formerly known as Monarch Entertainment Corporation)
Respondent
And between:
Robert
C. Strother, Strother Family Trust (Trust No. 1) and
University
Hill Holdings Inc. (formerly known as
589918
British Columbia Ltd.) (Company No. 1)
Appellants
and
3464920
Canada Inc. (formerly known as Monarch Entertainment Corporation)
Respondent
And between:
3464920
Canada Inc. (formerly known as Monarch Entertainment Corporation)
Appellant
and
Robert
C. Strother, Davis & Company, a partnership, J. Paul Darc,
Pacific
Cascadia Capital Corporation, Sentinel Hill Entertainment
Corporation,
Sentinel Hill Productions Corporation, Sentinel Hill
Productions
II Corporation, Sentinel Hill Productions (1999) Corporation,
Sentinel
Hill Management Corporation, Sentinel Hill 1999‑1 Master Limited
Partnership,
Sentinel Hill 1999‑2 Master Limited Partnership, Sentinel Hill 1999‑3
Master
Limited Partnership, Sentinel Hill 1999‑4 Master Limited Partnership,
Sentinel
Hill 1999‑5 Master Limited Partnership, Sentinel Hill 1999‑6 Master
Limited
Partnership, J. Paul Darc and Leslie Marie Darc, Trustees of the
Darc
Family Trust, and the said Darc Family Trust, Sentinel Hill 1998 Master
Limited
Partnership, Sentinel Hill 1998‑2 Master Limited Partnership,
Sentinel
Hill Productions No. 5 Limited Partnership, Sentinel Hill Productions
No.
7 Limited Partnership, Sentinel Hill 1999 Master Limited Partnership,
Sentinel
Hill Ventures Corporation, Sentinel Hill Alliance Atlantis Equicap
Millenium
Limited Partnership, Sentinel Hill Productions III Corporation,
Sentinel
Hill Alliance Atlantis Equicap Limited Partnership, Sentinel Hill GP
Corporation,
Company No. 1, Company No. 2, Company No. 3, Company No. 4,
Company
No. 5, Company No. 6, Company No. 7, Company No. 8, Company No. 9, Company No.
10, Partnership No. 1, Partnership No. 2, Partnership No. 3,
Partnership
No. 4, Partnership No. 5, Partnership No. 6, Partnership No. 7,
Partnership
No. 8, Partnership No. 9, Partnership No. 10,
Trust
No. 1, Trust No. 2, Trust No. 3, Trust No. 4, Trust No. 5, Trust No. 6,
Trust
No. 7, Trust No. 8, Trust No. 9 and Trust No. 10
Respondents
‑ and ‑
Canadian Bar
Association
Intervener
Coram:
McLachlin C.J. and Bastarache, Binnie, LeBel, Deschamps, Fish, Abella, Charron
and Rothstein JJ.
Reasons for
Judgment:
(paras. 1 to 116)
Reasons
Dissenting in Part:
(paras. 117 to 165)
|
Binnie J. (Deschamps, Fish, Charron and Rothstein JJ.
concurring)
McLachlin C.J. (Bastarache,
LeBel and Abella JJ. concurring)
|
______________________________
Strother v. 3464920 Canada Inc., [2007] 2 S.C.R. 177, 2007
SCC 24
Davis & Company, a partnership Appellant
v.
3464920 Canada Inc. (formerly known as
Monarch Entertainment Corporation) Respondent
- and -
Robert C. Strother Appellant
v.
3464920 Canada Inc. (formerly known as
Monarch Entertainment Corporation) Respondent
- and -
Robert C. Strother, Strother Family Trust (Trust
No. 1) and
University Hill Holdings Inc. (formerly known as
589918 British Columbia Ltd.) (Company No. 1) Appellants
v.
3464920 Canada Inc. (formerly known as
Monarch Entertainment Corporation) Respondent
- and -
3464920 Canada Inc. (formerly known as
Monarch Entertainment Corporation) Appellant
v.
Robert C. Strother, Davis & Company, a partnership,
J. Paul Darc,
Pacific Cascadia Capital Corporation, Sentinel Hill Entertainment
Corporation, Sentinel Hill Productions Corporation, Sentinel Hill
Productions II Corporation, Sentinel Hill Productions (1999)
Corporation,
Sentinel Hill Management Corporation, Sentinel Hill 1999‑1
Master Limited Partnership, Sentinel Hill 1999‑2 Master
Limited Partnership, Sentinel Hill 1999‑3 Master Limited
Partnership, Sentinel Hill 1999‑4 Master Limited
Partnership,
Sentinel Hill 1999‑5 Master Limited Partnership,
Sentinel Hill 1999‑6 Master Limited Partnership,
J. Paul Darc and Leslie Marie Darc,
Trustees of the Darc Family Trust, and the said Darc Family Trust,
Sentinel Hill 1998 Master Limited Partnership,
Sentinel Hill 1998‑2 Master Limited Partnership,
Sentinel Hill Productions No. 5 Limited Partnership,
Sentinel Hill Productions No. 7 Limited Partnership,
Sentinel Hill 1999 Master Limited Partnership,
Sentinel Hill Ventures Corporation, Sentinel Hill Alliance
Atlantis Equicap Millenium Limited Partnership,
Sentinel Hill Productions III Corporation,
Sentinel Hill Alliance Atlantis Equicap Limited Partnership,
Sentinel Hill GP Corporation, Company No. 1, Company
No. 2,
Company No. 3, Company No. 4, Company No. 5, Company
No. 6,
Company No. 7, Company No. 8, Company No. 9, Company
No. 10,
Partnership No. 1, Partnership No. 2, Partnership
No. 3,
Partnership No. 4, Partnership No. 5, Partnership
No. 6,
Partnership No. 7, Partnership No. 8, Partnership
No. 9,
Partnership No. 10, Trust
No. 1, Trust No. 2, Trust No. 3,
Trust No. 4, Trust No. 5, Trust No. 6, Trust
No. 7, Trust No. 8,
Trust No. 9 and Trust No. 10 Respondents
and
Canadian Bar Association Intervener
Indexed as: Strother v. 3464920 Canada Inc.
Neutral citation: 2007 SCC 24.
File No.: 30838.
2006: October 11; 2007: June 1.
Present: McLachlin C.J. and Bastarache, Binnie, LeBel,
Deschamps, Fish, Abella, Charron and Rothstein JJ.
on appeal from the court of appeal for british columbia
Law of professions — Barristers and solicitors —
Duty of loyalty — Conflict of interest — Client suing lawyer and law firm for
breach of fiduciary duty and breach of confidence after lawyer took a financial
interest in a second client in same line of business — Trial judge dismissing
claim but Court of Appeal ordering lawyer to disgorge to first client all
benefits and profits received or receivable from second client’s companies and
ordering law firm to disgorge profits earned in form of legal fees from second
client — Whether lawyer breached fiduciary duty owed to first client by
accepting personal financial interest in second client — Whether lawyer wrongly
used confidential information belonging to first client.
Commercial law — Partnerships — Vicarious liability
— Client suing lawyer and law firm for breach of fiduciary duty and breach of
confidence after lawyer took a financial interest in a second client in same
line of business — Whether law firm liable for lawyer’s breach of fiduciary
duty — Whether words “wrongful act or omission” in s. 12 of Partnership
Act include equitable wrong — Whether wrongful act was “in the ordinary course
of the business” of law firm — Partnership Act, R.S.B.C. 1996, c. 348,
s. 12.
Equity — Remedies — Breach of fiduciary duty —
Disgorgement of profit — Client suing lawyer and law firm for breach of
fiduciary duty and breach of confidence after lawyer took a financial interest
in a second client in same line of business — Trial judge dismissing claim but
Court of Appeal ordering lawyer to disgorge to first client all benefits and
profits received or receivable from second client’s companies and ordering law
firm to disgorge profits earned in form of legal fees from second client —
Whether remedy ordered appropriate — Whether period during which profits must
be accounted for appropriate — Whether lawyer’s profit should be apportioned.
In the 1990s, Monarch devised and marketed tax shelter
investments whereby Canadian taxpayers, through ownership of units in a limited
partnership, provided film production services to American studios making films
in Canada. In 1996 and 1997, Monarch engaged S and the appellant law firm
pursuant to written retainer agreements. The retainer expressly prohibited the
firm from acting for clients other than Monarch in relation to the tax‑shelter
schemes (with limited exceptions). The written retainer terminated at the end
of 1997, but Monarch continued thereafter as a client of the firm. In
November 1996, the federal Minister of Finance announced his intention to
amend the Income Tax Act to defeat the tax shelters. This was done by
the introduction of Matchable Expenditures Rules. Subsequently, S advised Monarch
that he did not have a “fix” to avoid the effect of the Rules. By the end of
October 1997, Monarch’s tax‑shelter business was winding down. Several
employees were laid off, including D.
In late 1997 or early 1998, D approached S to discuss
the potential of revised tax‑assisted film production services
opportunities. S drafted a proposal that was submitted to Revenue Canada in
March of 1998. S and D had agreed in January 1998 that S would receive
55 percent of the first $2 million of profit of the new company
Sentinel should the tax ruling be granted and 50 percent thereafter. S did not
tell Monarch about the possibility of a revival in the film production services
business at any time. A favourable tax ruling was issued by Revenue Canada to
Sentinel in October 1998. S did not advise Monarch of the existence of
this ruling. A further ruling addressing studio concerns was issued in
December. Throughout 1998 and into 1999, the law firm continued to do some
work for Monarch on outstanding matters relating to film production services
transactions as well as unrelated general corporate work. In August 1998,
S wrote a memorandum to the management committee of the firm about a possible
conflict of interest with respect to acting simultaneously for Monarch and
D/Sentinel. The memo referred, inaccurately, to S only having an option to
acquire up to 50 percent of the common shares of Sentinel. The firm’s
managing partner told S that he would not be permitted to own any interest in
Sentinel.
Effective March 31, 1999, S resigned from the law
firm and in April joined D as a 50 percent shareholder in Sentinel. After
learning of Sentinel’s tax ruling, Monarch sued S and the firm for breach of
fiduciary duty and breach of confidence. The trial judge dismissed the claim.
The Court of Appeal substantially allowed the appeal and ordered S to account
for and disgorge to Monarch all benefits and profits received or receivable
from Sentinel. It also ordered that the law firm disgorge the profits it
earned in the form of legal fees from acting for Sentinel in breach of its duty
to Monarch from January 1, 1998 and return to Monarch all fees paid by it
from that date. S and the law firm appealed, and Monarch cross‑appealed
the dismissal of its claims against D and Sentinel.
Held
(McLachlin C.J. and Bastarache, LeBel and Abella JJ. dissenting in
part on the appeals): The appeals should be allowed in part and the cross‑appeal
dismissed.
Per Binnie, Deschamps,
Fish, Charron and Rothstein JJ.: When a lawyer is retained by a client,
the scope of the retainer is governed by contract. The solicitor‑client
relationship thus created is, however, overlaid with certain fiduciary
responsibilities, which are imposed as a matter of law. Fiduciary duties
provide a framework within which the lawyer performs the work and may include
obligations that go beyond what the parties expressly bargained for. Fiduciary
responsibilities include the duty of loyalty, of which an element is the
avoidance of conflicts of interest. [34‑35]
The subject matter of the 1998 retainer was “tax‑assisted
business opportunities”. Subject to confidentiality considerations for other
clients, if S knew there was still a way to continue to syndicate
U.S. studio film production expenses to Canadian investors on a tax‑efficient
basis, the 1998 retainer entitled Monarch to be told that S’s previous
negative advice was now subject to reconsideration. While generally a lawyer
does not have a duty to alter a past opinion in light of a subsequent change of
circumstances, there are exceptions to the general rule. Here Monarch’s
written 1997 retainer had come to an end but the solicitor‑client
relationship based on a continuing (if more limited) retainer in relation to
tax-assisted film production services carried on into 1998 and 1999. [40]
[43] [45‑46]
The issue here was not so much a duty to alter a past
opinion, as it was part of S’s duty to provide candid advice on all matters
relevant to the continuing 1998 retainer. Moreover, there was no excuse
for S not to advise Monarch of the successful tax ruling when it was made
public in October 1998. As it turned out, Monarch did not find out about
it until February or March 1999. Accordingly, the firm (and S) failed to
provide candid and proper legal advice in breach of the 1998 retainer.
However, Monarch cannot succeed in a claim for damages for breach of the
contract of retainer because it did not establish any damages flowing from the
alleged contractual breach. The issue therefore moves to fiduciary
duties. [46‑48]
The firm and S were free to take on D and Sentinel as
new clients once the “exclusivity” arrangement with Monarch expired at the end
of 1997. The retainer by Sentinel was not directly adverse to any immediate
interest of Monarch. Issues of confidentiality are routinely dealt with
successfully in law firms. S could have managed the relationship with the two
clients as other specialist practitioners do, by being candid with their legal
advice while protecting from disclosure the confidential details of the other
client’s business. S accepted Sentinel as a new client and the firm was given
no reason to think that he and his colleagues could not provide proper legal
advice to both clients. Commercial conflicts between clients that do not
impair a lawyer’s ability to properly represent the legal interests of both
clients will not generally present a conflict problem. Whether or not a real risk
of impairment exists will be a question of fact. The risk did not exist here
if the necessary even‑handed representation had not been skewed by S’s
personal undisclosed financial interest. [52] [55] [65]
In each case where no issue of potential abuse of
confidential information arises, the court should evaluate whether there is a
serious risk that the lawyer’s ability to properly represent the complaining
client may be adversely affected, and if so, what steps short of
disqualification (if any) can be taken to provide an adequate remedy to avoid
this result. [59]
S was not free to take a personal financial interest
in the D/Sentinel venture. The difficulty is not that Sentinel and Monarch
were potential competitors. The difficulty is that S aligned his personal
financial interest with the former’s success. By acquiring a substantial and
direct financial interest in one client (Sentinel) seeking to enter a very
restricted market related to film production services in which another client
(Monarch) previously had a major presence, S put his personal financial
interest into conflict with his duty to Monarch. The conflict compromised S’s
duty to “zealously” represent Monarch’s interest. Taking a direct and
significant interest in the potential profits of Monarch’s commercial
competitor created a substantial risk that his representation of Monarch would
be materially and adversely affected by consideration of his own interests. In
time, the risk became a fact. [66‑67] [69]
The firm, for its part, did not breach its fiduciary
duty to Monarch. The firm’s partners were innocent of S’s breach. The firm
cannot be held to have breached a fiduciary duty on the basis of facts of which
its partners were ignorant. [98]
Equitable remedies are always subject to the
discretion of the court. In these circumstances, disgorgement is imposed on
faithless fiduciaries to serve a prophylactic purpose. Denying S profit
generated by the financial interest that constituted his conflict teaches that
conflicts of interest do not pay. The prophylactic purpose thereby advances
the policy of equity, even at the expense of a windfall to the wronged
beneficiary. However, the Court of Appeal imposed an excessive award of
compensation against S and his appeals should therefore be allowed in part.
The prophylactic purpose would be served if S is required to account to Monarch
for all monies received during or attributable to his period with the firm
between January 1, 1998 and March 31, 1999. At that point, both Monarch
and S had severed their links with the firm, and the conflict was spent. [1]
[74] [77] [95]
The law firm’s appeal should be allowed in part.
While the firm committed no breach of fiduciary duty to Monarch, it is liable
for S’s breaches of fiduciary duty, of which its partners are innocent, only
because of the terms of s. 12 of the B.C. Partnership Act. The
words “wrongful act or omission” in s. 12 are broad enough to embrace an
equitable wrong, and S’s wrongful act was so connected with the firm’s ordinary
business that it led to a breach of Monarch’s retainer of the firm. The firm
is accordingly liable under the Act with S to account for S’s profits for the
period from January 1, 1998 to March 31, 1999. [1] [100] [106] [113‑114]
A return of the fees charged to Monarch by the law
firm in 1998 and 1999 for general corporate services and “clean‑up” work
on prior transactions should not be ordered. However, to the extent S
personally made a profit under the firm allocation process attributable to
hours docketed to Monarch’s account, or to fees paid to the firm by Monarch,
such profit (earned at a time when S was in a position of conflict, and
derelict in his duty to Monarch) should form part of S’s accounting to
Monarch. The legal fees paid by Sentinel to the firm cannot be said to be in
consequence of breaches of fiduciary duties owed by the firm to Monarch since
there was no conflict known to the firm that prevented it from acting for both
Sentinel and Monarch. These fees therefore do not have to be disgorged. [80]
[83]
While some of the clauses in the Sentinel documents
were almost identical to those in Monarch’s production services agreement, it
is not enough to show that a particular transaction document has its “genesis”
in a prior transaction document. Monarch failed to establish a breach of
confidence and its claim in that regard was properly dismissed. [110‑111]
Monarch’s cross‑appeal against D should be
dismissed for the reasons given by the Court of Appeal. [112]
Per McLachlin C.J.
and Bastarache, LeBel and Abella JJ. (dissenting in part on the appeals):
A conflict of interest arises when a lawyer puts himself or herself in a
position of having irreconcilable duties or interests. The starting point in
determining whether a conflict arose in a particular case is the contract of
retainer between the lawyer and the complaining party. The nature and scope of
a lawyer’s retainer is purely a factual question on which the trial judge’s
findings should not ordinarily be upset on appeal save for error arising from
misapprehension of the evidence. This is especially true where, as here, the
alleged breach is an ethical one. The question then is whether these duties
conflicted with the lawyer’s duties to a second client, or with his or her
personal interests. If so, the lawyer’s duty of loyalty is violated, and
breach of fiduciary duty is established. The duty of loyalty is not a duty in
the air, but is attached to the obligations the lawyer has undertaken pursuant
to the retainer. [132] [134‑135] [142]
Here, the trial judge was correct to begin by asking
what the contract obliged S to do for Monarch. Whatever S undertook to do, he
was bound to do it with complete loyalty in accordance with his fiduciary
obligation. The trial judge did not misapprehend the evidence and therefore
there is no basis to overturn his findings. Given the limited nature of the
retainer in 1998, there was no conflict between what S agreed to do for Monarch
and what he was doing for D and himself with Sentinel. Neither S’s obligation
to D and Sentinel, nor his taking of a personal interest in Sentinel’s profits,
directly conflicted with his duties to Monarch. The Monarch retainer permitted
S to take on new clients or interests. Only if Monarch had specifically asked
S for advice on new film tax‑shelter opportunities and S had agreed to
give that advice could S have been under any duty to provide Monarch with such
advice, placing him in a conflict of interest with Sentinel. On the trial
judge’s findings, this never happened. [143] [145]
The Court of Appeal erred in holding that S’s duty to
Monarch extended beyond the terms of the 1998 retainer agreement, grounding an
on‑going duty to advise Monarch of any developments in the film
production tax‑shelter business. The trial judge made clear findings of
fact as to the limited scope of the retainer between the firm and Monarch, and
on this basis concluded that no conflict arose when S took on a second client
in the same line of business. The trial judge’s findings stand unimpeached,
and on the applicable law he correctly concluded that S did not breach his
contractual or fiduciary duty to Monarch. [119] [131] [150]
Monarch’s cross‑appeal should be dismissed for
the reasons given by the Court of Appeal and endorsed by the majority. [164]
Cases Cited
By Binnie J.
Applied: R. v. Neil,
[2002] 3 S.C.R. 631, 2002 SCC 70; referred to: MacDonald
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v. Shore Gold Inc. (2006), 278 Sask. R. 171, 2006 SKQB 101; Dobbin v.
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de la Cruz, [2004] B.C.J. No. 72 (QL),
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Hodgkinson v. Simms, [1994] 3 S.C.R. 377; Canson
Enterprises Ltd. v. Boughton & Co., [1991] 3 S.C.R. 534; Chan
v. Zacharia (1984), 154 C.L.R. 178; Warman International Ltd.
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[2005] 3 S.C.R. 3, 2005 SCC 58; E.B. v. Order of the
Oblates of Mary Immaculate in the Province of British Columbia, [2005]
3 S.C.R. 45, 2005 SCC 60.
By McLachlin C.J. (dissenting in part on the
appeals)
Hilton v. Barker Booth and Eastwood, [2005] 1 All E.R. 651; R. v. Neil, [2002]
3 S.C.R. 631, 2002 SCC 70; Hodgkinson v. Simms,
[1994] 3 S.C.R. 377; Smith v. McInnis, [1978]
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Tax Act, R.S.C. 1985, c. 1
(5th Supp .), s. 18.1(15) (b).
Partnership Act, R.S.B.C. 1996, c. 348, ss. 11, 12, 14.
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APPEALS and CROSS‑APPEAL from judgments of the
British Columbia Court of Appeal (Newbury, Hall and Oppal JJ.A.) (2005),
38 B.C.L.R. (4th) 159, 208 B.C.A.C. 39, 344 W.A.C. 39,
1 B.L.R. (4th) 302, 28 C.C.L.T. (3d) 159, [2005] 3 C.T.C. 168,
2005 D.T.C. 5059, [2005] 5 W.W.R. 108, [2005] B.C.J.
No. 80 (QL), 2005 BCCA 35, and (Newbury, Hall and Levine JJ.A.)
(2005), 44 B.C.L.R. (4th) 275, 215 B.C.A.C. 9, 355 W.A.C. 9,
8 B.L.R. (4th) 4, 256 D.L.R. (4th) 319, 47 C.C.E.L.
(3d) 159, [2005] 11 W.W.R. 399, [2005] 5 C.T.C. 107,
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1 C.T.C. 88, 2002 D.T.C. 7327, [2002]
B.C.J. No. 1982 (QL), 2002 BCSC 1179. Appeals allowed in
part, McLachlin C.J. and Bastarache, LeBel and Abella JJ. dissenting
in part. Cross‑appeal dismissed.
Irwin G. Nathanson, Q.C., Ardella A. Thompson and
Geoffrey Gomery, for the appellant/respondent Davis & Company, a
partnership.
Rose‑Mary Liu Basham, Q.C., Robert D. Holmes and
Leslie J. Muir, for the respondent/appellant 3464920 Canada
Inc. (formerly known as Monarch Entertainment Corporation).
George K. Macintosh, Q.C., J. Kenneth McEwan, Q.C., and
Robin M. Elliot, Q.C., for the appellant/respondent
Robert C. Strother, the appellants Strother Family Trust (Trust
No. 1) and University Hill Holdings Inc. (formerly known as
589918 British Columbia Ltd.) (Company No. 1), and the respondents
Partnership No. 1, Partnership No. 2, Partnership No. 3,
Partnership No. 4, Partnership No. 5, Partnership No. 6,
Partnership No. 7, Partnership No. 8, Partnership No. 9,
Partnership No. 10, Trust No. 1, Trust No. 2, Trust No. 3,
Trust No. 4, Trust No. 5, Trust No. 6, Trust No. 7, Trust
No. 8, Trust No. 9 and Trust No. 10.
Kenneth N. Affleck,
Q.C., Lisa A. Warren and Michael J. Sobkin, for the
respondents J. Paul Darc, Pacific Cascadia Capital Corporation, Sentinel Hill
Entertainment Corporation, Sentinel Hill Productions Corporation, Sentinel Hill
Productions II Corporation, Sentinel Hill Management Corporation, J. Paul Darc
and Leslie Marie Darc, Trustees of the Darc Family Trust, and the said Darc
Family Trust, Company No. 1, Company No. 2, Company No. 3,
Company No. 4, Company No. 5, Company No. 6, Company No. 7,
Company No. 8, Company No. 9 and Company No. 10.
David C. Harris,
Q.C., and Andrea N. MacKay, for the respondents Sentinel Hill
Productions (1999) Corporation, Sentinel Hill 1999‑1 Master Limited
Partnership, Sentinel Hill 1999‑2 Master Limited Partnership, Sentinel
Hill 1999‑3 Master Limited Partnership, Sentinel Hill 1999‑4 Master
Limited Partnership, Sentinel Hill 1999‑5 Master Limited Partnership,
Sentinel Hill 1999‑6 Master Limited Partnership, Sentinel Hill 1998
Master Limited Partnership, Sentinel Hill 1998‑2 Master Limited Partnership,
Sentinel Hill Productions No. 5 Limited Partnership, Sentinel Hill
Productions No. 7 Limited Partnership, Sentinel Hill 1999 Master Limited
Partnership, Sentinel Hill Ventures Corporation, Sentinel Hill Alliance
Atlantis Equicap Millenium Limited Partnership, Sentinel Hill Productions III
Corporation, Sentinel Hill Alliance Atlantis Equicap Limited Partnership and
Sentinel Hill GP Corporation.
Terrence J. O’Sullivan
and M. Paul Michell, for the intervener the Canadian Bar Association.
The judgment of Binnie, Deschamps, Fish, Charron and
Rothstein JJ. was delivered by
1
Binnie J. — A
fundamental duty of a lawyer is to act in the best interest of his or her
client to the exclusion of all other adverse interests, except those duly
disclosed by the lawyer and willingly accepted by the client. The appellant
Robert Strother, a successful tax partner with the appellant Davis &
Company (“Davis”) in Vancouver, was found by the Court of Appeal of British
Columbia to have put his own financial interest in one client (Sentinel) ahead
of his duty to another client (Monarch) in breach of his fiduciary duty.
Fiduciary duties provide the framework (enforced by the courts and by the Law
Society of British Columbia) within which a particular contractual mandate is
to be carried out. The issue here is whether (as the trial judge held) those
responsibilities were sufficiently limited by the scope of the retainer so as
to afford Monarch no relief; or whether, on the contrary, the fiduciary duty is
broader than the trial judge thought (as held by the Court of Appeal) and was
breached either by Strother or Davis or both and, if so, what the appropriate
remedy is. For the reasons which follow, I conclude that the trial judge did
not correctly construe the scope of Monarch’s 1998 retainer of Davis and
Strother, and thus did not pursue the analysis of fiduciary duty far enough.
In my view, the Court of Appeal correctly analysed the retainer and found a
breach of fiduciary duty by Strother. I would allow the appeal by the Davis
firm (which was an innocent party in Strother’s misconduct) against any direct
liability for breach of fiduciary duty, but give effect to Monarch’s statutory
claim against Davis for vicarious liability under the Partnership Act,
R.S.B.C. 1996, c. 348. I also conclude that the Court of Appeal imposed an
excessive award of compensation against Strother. I would therefore allow
both appeals in part for the reasons which follow. Monarch’s cross-appeal
should be dismissed.
I. Facts
2
Monarch Entertainment Corporation (“Monarch” (now 3464920 Canada
Inc.)) began promoting tax‑assisted production services funding (“TAPSF”)
investments in 1993. It was owned by Stephen Cheikes and Nova Bancorp Capital
Management Ltd. The principal of Nova is Harry Knutson. Knutson and Cheikes
were introduced to one another by Davis. Paul Darc, a chartered accountant,
became Monarch’s chief operating officer in 1995, but was demoted the following
year to the position of chief financial officer.
A. The Tax Scheme
3
From 1993 to 1997, Monarch devised and marketed tax shelter
investments whereby Canadian taxpayers, through ownership of units in a limited
partnership, provided film production services to American studios making films
in Canada. In outline, the tax shelter worked like this. Limited partnerships
were established. The investors would notionally produce a film for a studio
in return for a fee, paid over time, that was contingent on the success of the
film. The contingency of the payment introduced a substantial element of risk,
and the right to receive such speculative income at some future date was
considered by Revenue Canada not to be a capital asset. Therefore,
expenditures for the film production were treated as deductible from other
income in the year the expenditures were incurred. The scheme yielded a loss
to the partnership in the early years because of the mismatch between the
front-end expenses in the year the film was made and the delayed and uncertain
return. The loss was deducted by investors from their unrelated income —
thereby sheltering this income from immediate taxation. If the film was a success,
the tax collector’s cut would at least be deferred.
4
The American studios shared in the tax deferral benefit of the
Canadian investors by an advantageous sale of their expenses of making the film
to the Canadian investors. Monarch derived a profit equal to the difference
between what the investors actually paid and what the studio received, less its
own expenses.
B. Monarch Retains Davis & Company
5
Robert Strother was one of the biggest billers at Davis and in
the mid-1990s Monarch was by far his biggest client (representing about half
his billings). The TAPSF shelter was considered almost too good to be true;
thus potential investors, fearing a government clampdown, required the
assurance of a favourable advance tax ruling from Revenue Canada. The
structuring of such shelters and negotiation of such rulings were key elements
of Strother’s expertise.
6
The fees paid to Davis were mostly determined on an agreed-upon
percentage of the volume of production transactions closed each year. The
trial judge found that Strother was instrumental in Monarch’s success ((2002),
26 B.L.R. (3d) 235, 2002 BCSC 1179, at para. 11). In 1996 and 1997, the firm’s
engagement was expressed in written retainer agreements. Effective October
1996, the retainer expressly prohibited Davis from acting for clients other
than Monarch in relation to TAPSF schemes (with limited exceptions). The
written retainer terminated at the end of 1997, but Monarch continued
thereafter as a firm client. Between 1993 and 1997 Monarch closed transactions
of almost $460 million, realized more than $13 million in profits and paid
Davis more than $5 million in legal fees.
C. Emergence of Stiff Competition
7
In 1996-1997, two other promoters entered the TAPSF business and
substantially reduced Monarch’s share of the market: Grosvenor Park Securities
Ltd. (“Grosvenor Park”) and Alliance Equicap Corporation (“Alliance”).
Monarch’s market share fell from almost 100 percent of the potential market in
1995 to 20 percent in 1996-1997.
D. The Minister of Finance Decides to Close
the Door
8
In November 1996, the federal Minister of Finance announced his
intention to amend the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp .) (“ITA ”),
to defeat the TAPSF tax shelters. This was done by the introduction of
Matchable Expenditures Rules (“MER”). Subsequently, Strother advised Monarch
that he did not have a “fix” to avoid the effect of the MER. As a transitional
measure, the government extended relief from the MER until the end of October
1997, but no further.
E. Monarch Looks for Other Opportunities
9
By the end of October 1997, Monarch’s TAPSF business had been
wound down. Several employees were laid off, including Paul Darc. Grosvenor
Park and Alliance also stopped promoting tax shelters and went out of the TAPSF
business. In late 1997, Monarch sought Strother’s advice about what could be
done to salvage what was left of their business, but he suggested that they
defer that discussion until the new year. The trial judge held: “I find that
Mr. Strother concealed nothing from Monarch in 1997 in order to take a benefit
for himself” (para. 91).
F. Strother Learns of a Possible “Fix”
10
At the end of October or beginning of November 1997, Joel
Nitikman, a tax lawyer with Fraser Milner Casgrain in Vancouver, contacted
Strother and told him that he thought there might be a way around the MER and
that 20th Century Fox was interested in exploring the possibility of having a
film financed using a somewhat different structure (the “Lade idea”) by
the Stern Group of companies (who were also clients of Strother’s) (trial
judgment, at para. 66). In the course of subsequent discussions in November
1997, Nitikman discussed with Strother s. 18.1(15)(b) which provided
that MER would not apply where more than 80.1 percent of the right to receive
income was realized before the end of the year in which the expenditure was
made. This meant that the maximum “loss” available for a tax deduction would
be 19.9 percent of production expenses (compared to 50 percent previously).
11
Strother was unable to get a favourable advance ruling from
Revenue Canada for the “Lade” scheme for Stern, but by the end of 1997,
in connection with this initiative, Strother obtained confirmation from Revenue
Canada that a favourable tax ruling was not out of the question for a film
production services transaction, as long as it complied with the new rules,
including s. 18.1(15)(b).
G. Darc/Sentinel Becomes a Client
12
In the fall of 1997 or early 1998, Strother was approached by
Paul Darc, a former executive of Monarch, to discuss potential opportunities.
Darc was working on a possible tax credit business (as opposed to a tax shelter
business). Strother discussed with Darc the s. 18.1(15)(b) exception.
Darc devised the idea of marrying a tax shelter and a tax credit business,
subordinating the shelter to the credits (to ensure that the business would not
run afoul of the general anti-avoidance rule of the ITA ). Under Darc’s
plan, the studio fee would not be contingent on the success of the film but
rather was fixed at 80.1 percent.
13
Darc was able to put together enough of a scheme to convince
Strother to draft a nine-page proposal that was submitted to Revenue Canada in
March of 1998. Although the trial judge found as a fact that Strother honestly
felt throughout 1997 and even after learning of Darc’s proposal that the TAPSF
shelter was dead for good, Strother was obviously persuaded that Darc’s scheme
was worth a try, and far from holding that opinion as a disinterested lawyer,
he agreed to volunteer his services without charge to attempt to obtain the
ruling, in exchange for a personal benefit. Strother later told his partners
that he had an “option” to acquire up to 50 percent of the common shares of a
new company called Sentinel Hill Entertainment Corporation (“Sentinel” or
“Sentinel Hill”), a shelf company owned by Darc, but in fact, on the evidence, he
and Darc had agreed in January 1998 that Strother would receive 55 percent of
the first $2 million of profit should the tax ruling be granted and 50 percent
thereafter. Out-of-pocket expenses for the ruling request were to be shared
equally. Strother did not tell Monarch about the possibility of a revival in
the film production services business at any time.
H. Sentinel Obtains Advance Tax Ruling
14
A favourable tax ruling was issued by Revenue Canada to Sentinel
on October 6, 1998 based on the s. 18.1(15)(b) exception to the MER. A
further ruling addressing studio concerns was issued in December 1998.
Sentinel closed $260 million in studio production transactions by year-end of
1998. Subsequently, Grosvenor Park and Alliance obtained their own rulings and
were back in the film production services business by September 1999.
I. Monarch Was a Continuing Client of
Davis/Strother
15
In 1998, Strother met with Monarch executives on January 15, 21,
27 and May 19, June 26, July 24, August 4 and (by chance) in mid-September.
They testified that they asked Strother what business opportunities might be
available to Monarch in the wake of the new tax rules. They said they relied
on him to advise if there was a “way around” the MER that would allow them to
resume their TAPSF business. Cheikes testified in cross-examination as
follows:
Q. And I suggest, sir, that in fact that
you did not — Monarch did not approach Strother and Davis to request Strother
and Davis to develop a means to amend the structure. Isn’t that correct, sir?
A. It’s not correct. As I’ve said to you
what happened is Monarch had a general agreement and understanding in their
being represented by Davis & Company that that was a principal function
of the law firm for us, is when there is a change of tax law to find a way
around it. When the tax law was changed and we were told in 1996, November
of ‘96, that there was no absolutely no way around it, we followed Strother’s
advice to lobby the government, try to get an exception, and try again to get
grandfathering. But we were told, and we relied absolutely on his legal advice
that there was absolutely no way to get around the rules. The general
instruction though of our employment stayed in effect all the time. If there
is a way, Strother, if you know it now, if you know it in the future, that’s
your job for us. Find a way to get around any changes of the law. It was
first implicit, possibly not explicit at that point, but it was clearly the
central part of the retention of Davis & Company and Rob Strother for our
business. [Emphasis added.]
(Monarch’s R.R., vol. 1, at p. 84)
In his
evidence-in-chief, Strother testified:
A. And I think we had a general discussion,
that I had very little recollection of, which I’ve, I guess come to be
refreshed through the course of this litigation, and I think it was a,
where-are-we-going-now meeting with Mr. Knutson where we talked about some
of the things that I said earlier that we sort of put on hold while he was
getting closed and, and worrying about those issues. [Emphasis added.]
(Strother’s A.R., at p. 94)
In his factum,
Strother emphasizes the trial judge’s conclusion that
Mr. Knutson and Mr. Cheikes were not consulting Mr. Strother for advice
on the rules that had put an end to their tax shelter business or to explore
whether there was any possibility of that business in some way being
continued. They had no reason to do so and had no expectation of receiving any
advice in that regard. [Emphasis deleted; para. 24.]
16
Throughout 1998 and into 1999, Davis continued to do some work
for Monarch on outstanding matters relating to film production services
transactions that had closed by the end of October 1997 as well as unrelated
general corporate work. Through 1998 and into January 1999, Davis invoiced
Monarch more than $98,000 in legal fees.
J. Strother Makes Incomplete Disclosure to
Davis of His Side-Deal With Darc
17
On August 4, 1998, Strother wrote a memorandum to the management
committee of Davis about a possible conflict of interest with respect to acting
simultaneously for Monarch and Sentinel/Darc. He said that Sentinel’s
prospects were highly speculative and uncertain. He stated that during the
late fall of 1997 he met with Darc several times to discuss the possibility
of forming a company to carry out film production services transactions
(although in examination for discovery, Strother claimed that the meetings did
not occur until 1998). The memo referred, inaccurately, to Strother only
having “an option to acquire up to 50% of the
common shares” of Sentinel Hill (emphasis added). Strother also described a
conversation with an official of the Law Society of British Columbia that
resulted in Strother acknowledging that because of his financial interest in
Sentinel he was “potentially in technical breach” of Chapter 7 of the Law
Society’s Professional Conduct Handbook which provides:
1. Except as otherwise permitted by the Handbook,
a lawyer shall not perform any legal services for a client in a matter in
which:
(a) the lawyer has a direct or indirect
financial interest, or
(b) anyone, including a relative, partner,
employer, employee, business associate or friend of the lawyer, has a direct or
indirect financial interest which would reasonably be expected to affect the
lawyer’s professional judgement.
2. A lawyer shall not perform any legal
services for a client with whom or in which the lawyer or anyone, including a
relative, partner, employer, employee, business associate or friend of the
lawyer, has a financial or membership interest which would reasonably be
expected to affect the lawyer’s professional judgment.
The managing
partner of Davis, Douglas Buchanan, told Strother that he would not be
permitted to own any interest in Sentinel. Strother did not provide Buchanan
with a copy of the January 30th Agreement.
K. Strother Quits Davis
18
Effective March 31, 1999, Strother resigned from Davis and in
April joined Darc as a 50 percent shareholder in Sentinel. They hired Bradley
Sherman as a consultant and sales coordinator. (Until 1997, Sherman had been
the driving force behind Grosvenor Park.) Sherman and his associate, Kenneth
Gordon, acquired equity positions in a new vehicle, Sentinel Hill Ventures
Corporation, owned equally but indirectly by Strother, Darc, Sherman and
Gordon. As a result of further affiliation, the promoters formed Sentinel Hill
Alliance Atlantis Equicap Limited Partnership (“SHAAELP”) that became the
primary entity promoting the Sentinel Hill-Alliance business throughout 2000
and 2001.
19
By the time Parliament finally ended the late-blooming film
production services transactions through further amendments to the ITA
in September 2001, Sentinel and related enterprises had closed transactions
exceeding $4 billion with profits approaching $130 million. Darc and Strother
had together realized total profits in excess of $64 million. Davis acted for
the SHAAELP throughout and received fees exceeding $9 million.
L. Monarch Severs Relations With Davis
20
Monarch learned of Sentinel’s tax ruling through word of mouth
some four months after the ruling was granted. Neither Strother nor anyone
else at Davis had mentioned it. Monarch, feeling betrayed, promptly severed
its relationship with Davis and threatened legal action against Strother and
Darc. Monarch never reentered the film production services although it took
preliminary steps in that regard with the assistance of another law firm.
These efforts were discontinued in mid-2001 when Monarch learned that the
government was planning further amendments to the ITA to end such
shelters for good, which Parliament did as of the end of 2001.
II. Issues
21
On these facts, the following issues emerge:
1. Did Strother and/or Davis breach a
fiduciary duty owed to Monarch by accepting Darc/Sentinel as a new client?
2. Did Strother breach a fiduciary duty to
Monarch by accepting a personal financial interest in Sentinel, and if so, is
Davis also liable for that breach?
3. Did Strother wrongly use for his own
and/or Sentinel’s benefit confidential information belonging to Monarch?
4. If one or more of the above issues are
resolved in favour of Monarch, what remedies lie against Strother and/or Davis
and the various entities who profited by the default, if any, from 1998 to the
present?
III. Judicial History
A. British Columbia Supreme Court (2002),
26 B.L.R. (3d) 235, 2002 BCSC 1179
22
Lowry J. dismissed Monarch’s claim. While the relationship
between Monarch and Strother was fiduciary in nature, Strother’s duty to advise
was governed by the terms of the retainer, express or implied. He was only
obliged to act in Monarch’s best interests in relation to the advice he was
retained to give.
23
Lowry J. noted that the scope of the Davis retainer under the
1996-97 agreement was sufficiently broad to require Strother to stay apprised,
and keep Monarch apprised, of all legal developments which he recognized would
affect Monarch’s ability to continue to promote TAPSF investments. He found
that Strother’s advice to Monarch, that he had no technical fix and that, even
if he could devise one, he did not consider that any advance tax ruling could
be obtained, was the view he in fact held throughout 1997. Strother’s
pessimistic view was consistent with that held by Monarch’s competitors and
their tax advisers. Lowry J. concluded that in 1997 Strother gave Monarch all
of the advice concerning the MER and their impact on its business that was
required within the scope of the Davis 1997 retainer. He also concluded,
however, that in “the latter part of 1997”, when “those at Monarch looked to
Mr. Strother for ideas on what, if anything, they could do . . . Strother
suggested some alternative tax-assisted business opportunities that could be
explored. A decision was taken to defer consideration” until 1998 (para. 96).
24
The Davis retainer in 1998 was decidedly different from what it
had been in 1997. There was no continuing contractual requirement for Davis to
act exclusively for Monarch. Lowry J. held that after 1997, Strother was not
obliged to provide any advice to Monarch that was not specifically sought and
that he agreed to give. Strother was not, on any account, required to disclose
information of a competitive nature pertaining to the basis of the Sentinel
Hill advance tax ruling request. Strother was free to be consulted by Darc in
January 1998, and Davis was free to act for Sentinel thereafter.
25
Lowry J. observed that solicitors do not generally carry an
ongoing obligation to alter advice given under a concluded retainer because of
a subsequent change of circumstances provided the advice, when given, was
correct. Lowry J. concluded that, in 1998, there was no advice Strother was
required to give Monarch about how the s. 18.1(15)(b) exception might be
used in a film production services scheme. Moreover, neither Darc nor Strother
breached any confidences owed to Monarch. Monarch had not established that its
financing structure was held in confidence. With respect to transaction
documentation, Lowry J. held that solicitors are entitled to use documentation
they have prepared in the course of an earlier retainer providing that by their
doing so information is not disclosed which remains confidential to the client
for whom the documentation was initially prepared. Lowry J. did not consider
that Monarch had made out a case for a return of the fees paid to Davis.
B. British Columbia Court of Appeal (Newbury,
Hall and Oppal JJ.A.) (2005), 38 B.C.L.R. (4th) 159, 2005 BCCA 35 (“BCCA
#1”)
26
The appeal was allowed in part.
27
The court concluded that the duty of loyalty was breached by
Strother in this case, and that even accepting the facts found by the trial
judge, the dismissal of Monarch’s claims against him could not stand. Strother
was in a position of conflict in two senses — a conflict of duty between two
current clients, Monarch and Sentinel, and a conflict of interest between
Strother himself and Monarch, his client through 1998.
28
Newbury J.A. noted that although the term of the exclusivity/fee
agreement had expired at the end of 1997, the solicitor-client relationship
between Monarch and Davis continued, without the negotiation of a new written
agreement. The relationship now took the form more usual between corporate
clients and law firms: Monarch consulted as necessary on various matters from
time to time and Strother provided advice, or seconded other lawyers to do so
according to their expertise, and billed on the basis of the firm’s usual
hourly rates.
29
When Monarch asked “what could be done”, it was entitled to an
honest and complete answer, whether or not Strother had a file open for another
client for continuing TAPSF work. The fact that Monarch did not ask about s. 18.1(15)(b)
specifically, or seek repeated confirmations that Strother had not yet become
aware of the possibility of a “technical fix”, was not conclusive of his duty
to respond candidly.
30
In Newbury J.A.’s view, the trial judge also erred in law in
concluding that Strother was under no obligation to advise Monarch of the
possibility that TAPSF syndication would be revived or that Monarch should seek
advice elsewhere. As soon as Strother and Darc entered into their agreement in
January 1998, Strother was in a position of personal conflict — whether or not
his entitlement to a “profit” or “equity” participation was immediate or
contingent on obtaining a ruling. It was in his personal interest to ensure that
Monarch remained ignorant of what he knew — that a “technical fix” based on s.
18.1(15)(b) was a possibility.
31
Newbury J.A. concluded, “[a]fter much anxious consideration”,
that Strother was “required to account for and disgorge to Monarch all
benefits, profits, interests and advantages he ha[d] received or which he
[might] hereafter be entitled to receive, directly or indirectly . . . from or
through any of the Sentinel Hill Entities” (para. 61). She directed a
reference for this purpose. She further declared Strother, the Sentinel Hill
entities and other defendants owned or controlled by him to be constructive
trustees in favour of Monarch in respect of the profits, interests and benefits
in question. No direct liability on the Sentinel Hill entities was warranted
beyond the accounting already ordered.
C. Supplementary Decision (Newbury, Hall and
Levine JJ.A.) (2005), 44 B.C.L.R. (4th) 275, 2005 BCCA 385 (“BCCA #2”)
32
As to the vicarious liability of Davis, Newbury J.A. stated that
equity would not generally order an accounting or disgorgement by an innocent
person who had not received any of the profits resulting from the wrong. In
the result, she dismissed Monarch’s claim that Davis be required, jointly and
severally with Strother, to account for the profits and benefits received or
receivable by Strother from Sentinel Hill. However, she held that different
considerations applied to Monarch’s claim that Davis disgorge the profits it
earned in the form of legal fees as a result of acting for Sentinel Hill in
conflict with its duty to its original client, Monarch. Although it did not
appear that the partners of the firm were aware of the advice Strother was
giving, liability was imposed on the basis of vicarious liability.
Accordingly, Newbury J.A. ordered that the law firm account for and disgorge
the profits it earned from acting for Sentinel Hill in breach of its duty to
Monarch from and after January 1, 1998.
33
The Court of Appeal dismissed Monarch’s appeal from the trial
judge’s rejection of its claim that the fees (some $5,600,000) it had paid to
Davis between 1993 and 1999 should be returned to it. However, the court
ordered that Davis return to Monarch all fees (not including disbursements)
paid by Monarch from January 1, 1998 onwards.
IV. Analysis
34
When a lawyer is retained by a client, the scope of the retainer
is governed by contract. It is for the parties to determine how many, or how
few, services the lawyer is to perform, and other contractual terms of the engagement.
The solicitor-client relationship thus created is, however, overlaid with
certain fiduciary responsibilities, which are imposed as a matter of law. The
Davis factum puts it well:
The source of the duty is not the retainer itself, but all the
circumstances (including the retainer) creating a relationship of trust and
confidence from which flow obligations of loyalty and transparency. [para. 95]
Not every
breach of the contract of retainer is a breach of a fiduciary duty. On the
other hand, fiduciary duties provide a framework within which the lawyer
performs the work and may include obligations that go beyond what the parties
expressly bargained for. The foundation of this branch of the law is the need
to protect the integrity of the administration of justice: MacDonald Estate
v. Martin, [1990] 3 S.C.R. 1235, at pp. 1243 and 1265. “[I]t is of high
public importance that public confidence in that integrity be maintained”: R.
v. Neil, [2002] 3 S.C.R. 631, 2002 SCC 70, at para. 12.
35
Fiduciary responsibilities include the duty of loyalty, of which
an element is the avoidance of conflicts of interest, as set out in the
jurisprudence and reflected in the Rules of Practice of The Law Society of
British Columbia. As the late Hon. Michel Proulx and David Layton state,
“[t]he leitmotif of conflict of interest is the broader duty of loyalty”: Ethics
and Canadian Criminal Law (2001), at p. 287.
36
In recent years as law firms have grown in size and shrunk in
numbers, the courts have increasingly been required to deal with claims by
clients arising out of alleged conflicts of interest on the part of their
lawyers. Occasionally, a law firm is caught innocently in crossfire between
two or more clients. Sometimes the claim of conflict is asserted for purely
tactical reasons, an objectionable practice criticized in Neil at paras.
14-15, and a factor to be taken into account by a court in determining what
relief if any is to be accorded: De Beers Canada Inc. v. Shore Gold Inc.
(2006), 278 Sask. R. 171, 2006 SKQB 101; Dobbin v. Acrohelipro Global
Services Inc. (2005), 246 Nfld. & P.E.I.R. 177, 2005 NLCA 22.
Sometimes, however, the dilemma is of the lawyer’s own making. Here the firm’s
position was compromised by the personal conflict of a lawyer (Strother) who,
contrary to the instructions of Davis’s managing partner, contracted for a
personal financial interest in one client (Sentinel) whose interest he then
preferred over another client (Monarch) who now sues for compensation. In that
regard, Monarch relies upon the well-known proposition endorsed by Professors
Waters that:
The other (the beneficiary) is entitled to expect that the fiduciary
will be concerned solely for the beneficiary’s interests, never the fiduciary’s
own.
(D. W. M. Waters, “The Development of Fiduciary Obligations”, in R.
Johnson et al., eds., Gérard V. La Forest at the Supreme Court of Canada,
1985-1997 (2000), 81, at p. 83)
See, in
particular, Canadian Aero Service Ltd. v. O’Malley, [1974] S.C.R. 592.
The point was restated in the context of lawyers in Neil, at para. 24:
“Loyalty includes putting the client’s business ahead of the lawyer’s
business.” It was on this basis that Monarch succeeded in the British Columbia
Court of Appeal.
37
Robert Strother appeals to this Court. In his view,
he breached no fiduciary duty to Monarch. His position is that once the
“exclusivity” arrangement terminated at the end of 1997, he and Davis were free
to take on new clients seeking to exploit what was left of the tax-assisted
film production services market. He protests that the judgment of the Court of
Appeal leaves the reader with the impression that he was “watching the clock”
in order to begin working with Darc and Sentinel the moment the Monarch
exclusivity provision expired (Strother factum, at para. 25). I do not think
the Court of Appeal subscribed to such a conspiracy theory. Their focus was on
the 1998 retainer, which is where the focus should be. As Strother sees it, he
was under no duty in 1998 (unless specifically asked) to correct the advice he
had given to Monarch in 1997 (which he believed to be correct at the time it
was given) that he had “no fix” to the government measures designed to
terminate film production services tax shelters. As 1997 ended and 1998 began,
a page was turned and, in his view, neither Davis as a firm nor Strother as a
partner of the firm owed any fiduciary duty to Monarch that could give rise to
liability to Monarch.
38
Davis, for its part, joins in the grounds of appeal urged by
Strother but in addition distances itself from the consequences of Strother’s
personal financial involvement with Darc and Sentinel, which its managing partner
had expressly prohibited in August 1998.
A. The Scope of the 1998 Retainer
39
A critical issue in this case is the scope of Monarch’s
contractual retainer with Davis in 1998. Davis acknowledges “that a
solicitor’s duty of single-minded loyalty to his client’s interest had its
roots in the fiduciary nature of the solicitor-client relationship but that
duty ‘. . . may have to be moulded and informed by the terms of the contractual
relationship’” (Davis factum, at para. 80, citing Hilton v. Barker Booth and
Eastwood, [2005] 1 All E.R. 651 (H.L.)). At para. 30 of the Hilton
case, Lord Walker elaborated:
On this issue of liability both sides have been content for the case to
be dealt with as a claim for breach of contract. However, the content of BBE’s
contractual duty, so far as relevant to this case, has roots in the parties’
relationship of trust and confidence.
40
Here, too, the claim arises out of “the parties’ relationship of
trust and confidence” but the case is pleaded as a breach of the fiduciary duty
of loyalty rather than breach of contract. The critical findings of fact of
the trial judge as to the scope of the retainer include the following:
In 1998, Mr. Strother’s contact with Monarch was quite limited but,
arising out of suggestions he made during 1997 regarding the possibility of
exploring alternative tax-assisted business opportunities, he was
consulted to some extent by Mr. Knutson and Mr. Cheikes.
.
. .
During the latter part of 1997, those at Monarch
looked to Mr. Strother for ideas on what, if anything, they could do with
Monarch’s resources in light of the fact that tax-sheltered financing and their
production services investment business was ended. Mr. Strother suggested some
alternative tax-assisted business opportunities that could be
explored. A decision was taken [by Mr. Strother] to defer consideration to the
new year and that led to Mr. Knutson, and then later Mr. Cheikes, consulting
Mr. Strother in 1998. [Emphasis added; paras. 32 and 96.]
Where a
retainer has not been reduced to writing (as was the case with the 1998
retainer here) and no exclusions are agreed upon, as here, the scope of the
retainer may be unclear. The court should not in such a case strain to resolve
the ambiguities in favour of the lawyer over the client. The subject matter of
the retainer here was, as it had been for years, “tax-assisted business
opportunities”. It was not to sell an office building, draft an informatics
contract or perform other legal services unrelated to the subject matter of the
earlier advice. The trial judge exonerated Strother by placing the emphasis on
Monarch’s interest in “alternative” tax opportunities, but of course Monarch
only considered “alternative” tax opportunities because Strother had given
categorical advice that the tax-assisted film production services business in
which Strother had profitably been advising Monarch since 1993 was
unequivocally dead.
41
I believe, as did the Court of Appeal, that the trial judge erred
in drawing so narrowly the legal effect of his factual finding
that the retainer dealt with tax-assisted business opportunities, alternative
or otherwise. (In fact Strother’s position is that what he pursued on behalf
of Sentinel in 1998 was an alternative tax-assisted business opportunity
and not the same TAPSF scheme as he had pronounced dead in 1997.) Monarch was
a major Davis client of long standing. It had been Strother’s biggest source
of billings for years. It was in the business of marketing tax schemes whose
success turned on Strother’s expertise in finding a “way [to get] around the
rules” (to borrow a phrase from Cheikes (BCCA #1, at para. 14). Strother’s
factum emphasizes nice distinctions between tax credits, tax shelters and so on
(para. 24) but I do not think this oral retainer can or ought to be parsed so
closely.
42
Nor can I agree with the Chief Justice when she characterizes the
legal obligation arising out of the 1998 retainer as follows:
Only if Monarch had specifically asked Strother for advice on new film
tax-shelter opportunities and Strother had agreed to give that advice, could
Strother have been under any duty to provide Monarch with such advice, placing
him in a conflict of interest with Sentinel Hill. [para. 145]
Monarch’s tax
business was in a jam. Strother was still its tax lawyer. There was a
continuing “relationship of trust and confidence”. Monarch was dealing with
professional advisors, not used car salesmen or pawnbrokers whom the public may
expect to operate on the basis of “didn’t ask, didn’t tell”, and who
collectively suffer a corresponding deficit in trust and confidence. Therein
lies one of the differences between a profession and some businesses.
43
In my view, subject to confidentiality considerations for other
clients, if Strother knew there was still a way to continue to syndicate U.S.
studio film production expenses to Canadian investors on a tax-efficient basis,
the 1998 retainer entitled Monarch to be told that Strother’s previous negative
advice was now subject to reconsideration.
44
It is this contractual duty that came into conflict with
Strother’s personal financial interest when he took a major stake in Sentinel
which was, as Newbury J.A. pointed out, a competitor in a small market where
experience showed that, even limited, competition could lead to a rapid erosion
of market share.
B. Breach of the 1998 Retainer
45
The trial judgment, as stated, was premised on the finding that
Monarch did not specifically ask about the possible revival of TAPSF-type
shelters in 1998. I agree with the trial judge that generally a lawyer
does not have a duty to alter a past opinion in light of a subsequent change of
circumstances. This was discussed by W. M. Estey in Legal Opinions in
Commercial Transactions (2nd ed. 1997), at p. 519:
Thus, where an opinion was correct on the date on which it was given
but subsequently becomes erroneous due to a change in the law or in the facts
upon which the opinion was based, the opining lawyer is not liable for failing
to warn the addressee, at the later date, of the effect resulting from the
changed circumstances.
The rationale
behind the general rule is that a legal opinion speaks as of its date, and that
being the case, a lawyer is only obligated to exercise due care in rendering an
opinion based on the legal and factual circumstances existing at that time. A
client cannot assume that the lawyer’s opinion has an indefinite shelf life.
46
There are, however, exceptions to the general rule. As Deschamps
J. stated in Côté v. Rancourt, [2004] 3 S.C.R. 248, 2004 SCC 58, the
“boundaries of [a lawyer’s] duty to advise will depend on the circumstances”
(para. 6). The issue here was not so much a duty to alter a past opinion, as
it was part of Strother’s duty to provide candid advice on all matters relevant
to the 1998 retainer: Neil, at para. 19. It appears that Lowry
J. turned his mind to this exception to the general rule when he stated that a
lawyer is not obligated to “alter advice given under a concluded
retainer” (para. 121 (emphasis added)). Here Monarch’s retainer of Davis was not
a concluded retainer. The written 1997 retainer had come to an end but the
solicitor-client relationship based on a continuing (if more limited) retainer
carried on into 1998 and 1999. As Deschamps J. further observed in Côté,
“the obligational content of the lawyer-client relationship is not necessarily
circumscribed by the object of the mandate” (para. 6). The Côté
approach is not consistent with the “didn’t ask, didn’t tell” approach taken by
the trial judge. Strother was meeting with Monarch to brainstorm tax schemes
and knew perfectly well Monarch would be vitally interested in Strother’s
re-evaluation of the tax potential of the MER. The duty to advise Monarch
required Strother and Davis, as a term of the 1998 retainer, if not expressed
(as claimed by Monarch) then certainly implied, to explain to Monarch that
Strother’s earlier advice had been overtaken by events and would have to be
revisited. Indeed, Strother discussed this concern with another partner at
Davis, Rowland K. McLeod who testified in cross-examination as follows:
A. I did consider whether or not Monarch could
be told and I guess that would include should be told. . . . And my
recollection is that Mr. Strother came to me before a meeting that he was going
to have with Mr. Knutson [a principal of Monarch] and we discussed and
considered whether or not Monarch could be told [that the previous advice about
“no fix” had been premature], and my, my recollection was that we didn’t reach
a consensus on what could be done and he was going to play it by ear. . . . He
was afraid Mr. Knutson was going to ask him.
Q. When was that?
A. It was in, I think it was June of 1998.
. . . We discussed it, came to no conclusion. He went to the meeting, told me
either later that day or the next day, that the issue had not arisen.
[Emphasis added.]
(Davis’s A.R., at p. 196)
McLeod
continued:
A. The nature of the, the, the nature of
the discussion was, he was going to meet with Monarch. He was concerned that
Mr. Knutson would raise the question of is there a way around the, whatever
the change in the law was. [Emphasis added.]
(Davis’s A.R., at p. 198)
The fact that
Strother and McLeod discussed what should be said if Monarch put the right
question (“is there a way around . . .?”) recognized that Strother appreciated
that his modified view about the potential of the s. 18.1(15)(b)
exception would likely be of continuing interest and importance to Monarch
because Monarch was still looking to him for advice in rebuilding its shattered
tax-related business. At that point, of course, Strother had every interest in
keeping Monarch in the dark. In June of 1998, under the January 1998
agreement, he was entitled to 55 percent of the first $2 million in profits and
50 percent of Sentinel’s profits on the revival of tax-assisted film production
services deals, which constituted a small and select marketplace. The fewer
competitors faced by Sentinel the more money Strother would make and the faster
he would pocket it.
47
Of course, it was not open to Strother to share with Monarch any confidential
information received from Darc. He could nevertheless have advised Monarch
that his earlier view was too emphatic, that there may yet be life in a
modified form of syndicating film production services expenses for tax
benefits, but that because his change of view was based at least in part on
information confidential to another client on a transaction unrelated to
Monarch, he could not advise further except to suggest that Monarch consult
another law firm. Moreover, there is no excuse at all for Strother not
advising Monarch of the successful tax ruling when it was made public in
October 1998. As it turned out, Monarch did not find out about it until
February or March 1999. I therefore conclude that Davis (and Strother) failed
to provide candid and proper legal advice in breach of the 1998 retainer.
48
If this were a contract case, I would have had no hesitation in
holding both Davis and Strother liable for their failure to provide the timely
and candid advice they were contractually obliged to give within the scope of
their 1998 retainer. However, Monarch cannot succeed in a claim for damages
for breach of the contract of retainer because (as found by the trial judge) it
did not establish any damages flowing from the alleged breach. The issue
therefore moves to fiduciary duties.
C. Monarch’s Claim for Disgorgement
49
Monarch’s claim is not for the money Monarch itself might have
made had Strother given different advice (which the trial judge found was
unsupported by the evidence), but for disgorgement by Strother, Darc, Sentinel
and Davis of the money they did make between 1998 and 2001, which
Monarch says was made in breach of Strother’s and Davis’s fiduciary obligations
to it.
50
An accounting of profits and disgorgement are equitable remedies
and relate to Monarch’s claim that Strother, Darc and Davis breached their
fiduciary obligations in the following respects:
(1) Davis should have declined to take on
Darc and Sentinel as clients. Every dollar earned in consequence of that
retainer was therefore in breach of fiduciary duty.
(2) Strother should not have accepted a
personal financial interest in Sentinel. He should not benefit from this
conflict of interest, and should therefore disgorge consequential profits.
In my view,
only the claim related to Strother’s personal financial interest has merit. It
was that personal interest that came into conflict with Strother’s fiduciary
duty to avoid conflicts of interest in performing the contractual obligations
assumed under the 1998 retainer.
1. Davis Was Free to Take on Darc and
Sentinel as New Clients
51
Monarch claims (and the Court of Appeal agreed) that even after
the expiry of the “exclusive” retainer in 1997, Davis was conflicted out of
acting for Darc and Sentinel by reason of its ongoing solicitor-client
relationship with Monarch. As the House of Lords recently noted in relation
to conflicting contractual duties, “a solicitor who has conflicting
duties to two clients may not prefer one to another. . . . [T]he fact that he
[the lawyer] has chosen to put himself in an impossible position does not exonerate
him from liability” (Hilton, at para. 44). The same principle applies
to a lawyer getting into a position of conflicting fiduciary duties. As
Monarch’s fiduciary, Strother’s duty was to “avoid situations where he has, or
potentially may, develop a conflict”: Ramrakha v. Zinner (1994), 157
A.R. 279 (C.A.), at para. 73, as cited in Neil, at para. 25. The
general rule is of long standing but I do not think it applied here to prevent
Davis and Strother from acting for Sentinel. As stated in Neil, at para.
15:
An unnecessary expansion of the duty may be as inimical to the proper
functioning of the legal system as would its attenuation. The issue always is
to determine what rules are sensible and necessary and how best to achieve an
appropriate balance among the competing interests.
This is not to
say that in Neil the Court advocated the resolution of conflict issues
on a case-by-case basis through a general balancing of interests, the outcome
of which would be difficult to predict in advance. In MacDonald Estate,
similarly, the legal rule was arrived at after balancing various interests,
including trading off a client’s ability to choose counsel against other
considerations such as lawyer mobility. Once arrived at, however, the MacDonald
Estate rule protecting against disclosure of confidential information is
applied as a “bright line” rule. The client’s right to confidentiality trumps
the lawyer’s desire for mobility. So it is with Neil. The “bright
line” rule is the product of the balancing of interests not the gateway to
further internal balancing. In Neil, the Court stated (at para. 29):
The bright line is provided by the general rule that a lawyer may not
represent one client whose interests are directly adverse to the immediate
interests of another current client — even if the two mandates are unrelated —
unless both clients consent after receiving full disclosure (and preferably
independent legal advice), and the lawyer reasonably believes that he or she is
able to represent each client without adversely affecting the other. [Emphasis
in original.]
52
I agree with Strother’s counsel when he writes that “[t]he
retainer by Sentinel Hill was . . . not ‘directly adverse’ to any ‘immediate interest’
of Monarch”. On the contrary, as Strother argues, “Sentinel Hill created a
business opportunity which Monarch could have sought to exploit” (Strother
factum, at para. 66). A Sentinel ruling that revived the TAPSF business even
in modified form would indirectly help any firm whose tax syndication business
had been ruined by the ITA amendments, including Monarch.
Representation of Sentinel was thus not “directly adverse” to representation of
Monarch by Davis/Strother even though both mandates related to tax-assisted
business opportunities in the film production services field. Strother’s
problem arose because despite his duty to an existing client, Monarch, he
acquired a major personal financial interest (unknown to Davis) in another
client, Sentinel, in circumstances where his prospects of personal profit were
enhanced by keeping Monarch on the sidelines. In deference to the conclusion
reached by the British Columbia Court of Appeal that Davis was not free
to take on Darc and Sentinel as clients, however, I add the following
observations.
(a) Monarch Was a Current Client
53
I agree with Newbury J.A. that too much was made in argument
about the shift from the 1997 written retainer to the 1998 oral retainer. The
trial judge in places referred to a concluded retainer. However, this
is not a case where a former client alleges breach of the duty of loyalty,
as in Stewart v. Canadian Broadcasting Corp. (1997), 150 D.L.R.
(4th) 24 (Ont. Ct. (Gen. Div.)); Credit Suisse First Boston Canada Inc., Re (2004),
2 B.L.R. (4th) 109 (O.S.C.), and Chiefs of Ontario v. Ontario (2003), 63
O.R. (3d) 335 (S.C.J.). The issue of loyalty to a former client was dealt with
in MacDonald Estate (not Neil), and raises complex issues not
relevant here. Monarch was a current client and was unquestionably
entitled to the continuing loyalty of Strother and Davis.
(b) Acting for Clients With Competing
Commercial Interests
54
As recognized by both the trial judge and Newbury J.A., the
conflict of interest principles do not generally preclude a law firm or lawyer
from acting concurrently for different clients who are in the same line of
business, or who compete with each other for business. There was no legal dispute
between Monarch and Sentinel. Monarch relies on the “bright line” rule set out
in Neil but (leaving aside, for the moment, Strother’s personal
financial stake) there is no convincing case for its application here.
55
The clients’ respective “interests” that require the protection
of the duty of loyalty have to do with the practice of law, not commercial
prosperity. Here the alleged “adversity” between concurrent clients related to
business matters. This is not to say that commercial interests can never be
relevant. The American Restatement offers the example of two
business competitors who seek to retain a single law firm in respect of
competing applications for a single broadcast licence, i.e. a unique
opportunity. The Restatement suggests that acting for both without
disclosure and consent would be improper because the subject matter of both
retainers is the same licence (Restatement (Third) of Law Governing Lawyers,
vol. 2, at § 121 (2000)). The lawyer’s ability to provide even-handed
representation is put in issue. However, commercial conflicts between clients
that do not impair a lawyer’s ability to properly represent the legal
interests of both clients will not generally present a conflict problem.
Whether or not a real risk of impairment exists will be a question of fact. In
my judgment, the risk did not exist here provided the necessary even-handed
representation had not been skewed by Strother’s personal undisclosed financial
interest. Condominium lawyers act with undiminished vigour for numerous
entrepreneurs competing in the same housing market; oil and gas lawyers advise
without hesitation exploration firms competing in the oil patch, provided, of
course, that information confidential to a particular client is kept
confidential. There is no reason in general why a tax practitioner such as
Strother should not take on different clients syndicating tax schemes to the
same investor community, notwithstanding the restricted market for these
services in a business in which Sentinel and Monarch competed. In fact, in the
case of some areas of high specialization, or in small communities or other
situations of scarce legal resources, clients may be taken to have consented to
a degree of overlapping representation inherent in such law practices,
depending on the evidence: Bolkiah v. KPMG, [1999] 2 A.C. 222 (H.L.),
at p. 235; Kelly v. Cooper, [1993] A.C. 205 (P.C.). The more
sophisticated the client, the more readily the inference of implied consent may
be drawn. The thing the lawyer must not do is keep the client in the
dark about matters he or she knows to be relevant to the retainer: Neil,
at para. 19. As Story J. commented almost two centuries ago:
No man can be supposed to be indifferent to the knowledge of facts,
which work directly on his interests, or bear on the freedom of his choice of
counsel. When a client employs an attorney, he has a right to presume, if the
latter be silent on the point, that he has no engagements, which interfere, in
any degree, with his exclusive devotion to the cause confided to him; that he
has no interest, which may betray his judgment, or endanger his fidelity.
(Williams v. Reed, 29 F. Cas. 1386 (1824))
The client
cannot be taken to have consented to conflicts of which it is ignorant. The
prudent practice for the lawyer is to obtain informed consent.
(c) The Duty of Loyalty Is Concerned With
Client Representation
56
While the duty of loyalty is focussed on the lawyer’s ability to
provide proper client representation, it is not fully exhausted by the
obligation to avoid conflicts of interest with other concurrent
clients. A “conflict of interest” was defined in Neil as an interest
that gives rise to a
substantial risk that the lawyer’s representation of the client would
be materially and adversely affected by the lawyer’s own interests or by the
lawyer’s duties to another current client, a former client, or a third person.
(Neil, at para. 31, adopting § 121 of the Restatement
(Third) of Law Governing Lawyers, vol. 2, at pp. 244-45)
57
In Hilton, relied on by Davis, failure to disclose to one
client prejudicial (but not confidential) information about the other client in
a case where the defendant law firm acted for both clients in a joint venture
was held to be actionable in contract although the quality of the legal work,
as such, was not the subject of criticism. The House of Lords awarded damages
as a matter of contract law, but Martin v. Goldfarb (1998), 41 O.R. (3d)
161 (C.A.), suggests that in this country such a claim could also be brought
for breach of fiduciary duty even in the absence of a client-to-client
conflict. In that case, an Ontario lawyer was held liable in damages to a
client for breach of his fiduciary duty of candour to disclose his knowledge
that the client’s business adviser had a criminal record.
58
Exceptional cases should not obscure the primary function of the
“bright line” rule, however, which has to do with the lawyer’s duty to avoid
conflicts that impair the respective representation of the interest of his or
her concurrent clients whether in litigation or in other matters, e.g., Waxman
v. Waxman (2004), 186 O.A.C. 201 (C.A.).
(d) The Impact on the Representation of
Monarch Was “Material and Adverse”
59
The spectre is flourished of long-dormant files mouldering away
in a lawyer’s filing cabinet that are suddenly brought to life for purposes of
enabling a strategically minded client to assert a conflict for tactical
reasons. But a court is well able to withhold relief from a claim clearly
brought for tactical reasons. Conflict between concurrent clients where no
confidential information is at risk can be handled more flexibly than MacDonald
Estate situations because different options exist at the level of remedy,
ranging from disqualification to lesser measures to protect the interest of the
complaining client. In each case where no issue of confidential information
arises, the court should evaluate whether there is a serious risk that the
lawyer’s ability to properly represent the complaining client may be adversely
affected, and if so, what steps short of disqualification (if any) can be taken
to provide an adequate remedy to avoid this result.
60
There is no doubt that at all material times there was a “current
meaningful” solicitor-client relationship between Monarch and Davis/Strother to
ground the duty of loyalty (see, e.g., Uniform Custom Countertops Inc. v.
Royal Designer Tops Inc., [2004] O.J. No. 3090 (QL) (S.C.J.), at para.
54). The availability of Strother’s ongoing tax advice was important to
Monarch and is the cornerstone of its claim.
61
Strother is dismissive of the impact his breach had on Monarch’s
interest (i.e. in obtaining proper legal advice). He is correct that the test
requires that the impact must be “material and adverse” (as set out in the
definition of conflict adopted in Neil). While it is sufficient to show
a possibility (rather than a probability) of adverse impact, the possibility
must be more than speculation (see de Guzman v. de la Cruz,
[2004] B.C.J. No. 72 (QL), 2004 BCSC 36, at para. 27). That test is met here,
for the reasons already discussed. Once the existence of Strother’s personal
financial interest in Sentinel was established, it was for Strother, not
Monarch, to demonstrate the absence of any material adverse effect on Monarch’s
interest in receiving proper and timely legal advice (Celanese Canada Inc.
v. Murray Demolition Corp., [2006] 2 S.C.R. 189, 2006 SCC 36).
(e) Sentinel’s Desire to Secure the Counsel
of its Choice Was Also an Important Consideration
62
The evidence showed that Strother’s special expertise was
available from few other firms. Sentinel’s Paul Darc had worked successfully
with Davis and Strother for years. Our legal system, the complexity of which
perhaps reaches its apex in the ITA , depends on people with legal needs
obtaining access to what they think is the best legal advice they can get.
Sentinel’s ability to secure the advice of Davis and Strother as counsel of
choice is an important consideration (MacDonald Estate, at p. 1243; R.
v. Speid (1983), 43 O.R. (2d) 596 (C.A.); Coutu v. Jorgensen (2004),
202 B.C.A.C. 67, at para. 31; Neil, at para. 13). It does not trump the
requirement to avoid conflicts of interest but it is nevertheless an important
consideration.
2. The Difficulty in Representing
Monarch Arose From a Strother Conflict Not a Davis Conflict
63
Davis did not appreciate what Strother was up to and had no
reason to think the Sentinel retainer would interfere with the proper
representation of Monarch.
64
The Court of Appeal upheld Monarch’s claim that Strother/Davis
was not free to take on Darc/Sentinel for the following reason:
In this case, Mr. Strother should have told Mr. Darc that he “could not
accept this business”. His failure to do so meant that he could not be candid
with his existing client, Monarch, regarding a subject on which he had given
clear and unequivocal advice. He would have to “hold back” on what he would
normally advise Monarch, in order to protect the confidentiality of his other
client, Mr. Darc (and the Sentinel Hill companies).
(BCCA #1, at para. 25)
65
I believe, with respect, that this draws the prohibition too
broadly. In general, Davis and Strother were free to take on Darc and Sentinel
as new clients once the “exclusivity” arrangement with Monarch expired at the
end of 1997. Issues of confidentiality are routinely dealt with successfully
in law firms. Strother could have managed the relationship with the two
clients as other specialist practitioners do, by being candid with their legal
advice while protecting from disclosure the confidential details of the other
client’s business. If the two are so inextricably bound together that legal
advice is impossible, then of course the duty to respect confidentiality
prevails, but there is nothing here to justify Strother’s artful silence.
Strother accepted Sentinel as a new client and the Davis firm was given no
reason to think that he and his colleagues could not provide proper legal
advice to both clients.
3. Strother Was Not Free to Take a Personal
Financial Interest in the Darc/Sentinel Venture
66
The trial judge found that Strother agreed to pursue the tax
ruling on behalf of Sentinel in return for an interest in the profits that
would be realized by Sentinel if the ruling was granted:
Mr. Strother prepared the request for the ruling without charge in
return for Mr. Darc’s agreement that Mr. Strother would participate equally
(55% on the first $2 million) [and 50% thereafter] in any profit realized
through a share option should the desired ruling be granted. Responsibility
for expenses associated with the request would be equally borne. . . .
.
. .
. . . Mr. Strother agreed to seek for him an advance tax ruling and, as
indicated, to prepare the request without charge, in return for an equal share
in any success ultimately realized. [paras. 23 and 57]
67
Strother had at least an “option” interest in Sentinel
from January 30th until at least August 1998 (when he was told by Davis to
give up any interest). This was during a critical period when Monarch
was looking to Strother for advice about what tax-assisted business
opportunities were open. The precise nature of Strother’s continuing financial
interest in Sentinel between August 1998 and March 31, 1999 (when Strother left
Davis) is unclear, but whatever it was it came to highly profitable fruition in
the months that followed. The difficulty is not that Sentinel and Monarch were
potential competitors. The difficulty is that Strother aligned his personal
financial interest with the former’s success. By acquiring a substantial and
direct financial interest in one client (Sentinel) seeking to enter a very restricted
market related to film production services in which another client (Monarch)
previously had a major presence, Strother put his personal financial interest
into conflict with his duty to Monarch. The conflict compromised Strother’s
duty to “zealously” represent Monarch’s interest (Neil, at para. 19), a
delinquency compounded by his lack of “candour” with Monarch “on matters
relevant to the retainer” (ibid.), i.e. his own competing
financial interest: Nocton v. Lord Ashburton, [1914] A.C. 932 (H.L.); R.
v. Shamray (2005), 191 Man. R. (2d) 55, 2005 MBQB 1, at paras. 42-43; R.
v. Henry (1990), 61 C.C.C. (3d) 455 (Que. C.A.), at p. 465. See generally
R. F. Devlin and V. Rees, “Beyond Conflicts of Interest to the Duty of
Loyalty: from Martin v. Gray to R. v. Neil” (2005), 84 Can.
Bar Rev. 433.
68
As we have seen, the tax-assisted film production services
business was very competitive. Monarch’s TAPSF market share had been cut by 80
percent when Grosvenor and other competitors entered the field. If his “fix”
worked, Strother had every incentive to distance Monarch as a potential
competitor to Sentinel. The bigger Sentinel’s market share, the more business
it did, the more assured would be the initial $2 million profit and the faster
Strother would pocket it.
69
In these circumstances, taking a direct and significant interest
in the potential profits of Monarch’s “commercial competito[r]” (as described
by Lowry J., at para. 113) created a substantial risk that his representation
of Monarch would be materially and adversely affected by consideration of his
own interests (Neil, at para. 31). As Newbury J.A. stated, “Strother .
. . was ‘the competition’” (BCCA #1, at para. 29 (emphasis in
original)). It gave Strother a reason to keep the principals of Monarch “in
the dark” (ibid.), in breach of his duty to provide candid advice on his
changing views of the potential for film production services tax shelters. I
agree with Newbury J.A. that Monarch was “entitled to candid and
complete advice from a lawyer who was not in a position of conflict” (ibid.,
at para. 17 (emphasis in original)).
70
Strother could not with equal loyalty serve Monarch and pursue
his own financial interest which stood in obvious conflict with Monarch making
a quick re-entry into the tax-assisted film financing business. As stated in Neil,
at para. 24, “[l]oyalty includes putting the client’s business ahead of the
lawyer’s business”. It is therefore my view that Strother’s failure to revisit
his 1997 advice in 1998 at a time when he had a personal, undisclosed financial
interest in Sentinel Hill breached his duty of loyalty to Monarch. The duty
was further breached when he did not advise Monarch of the successful tax
ruling when it became public on October 6, 1998. Why would a rainmaker like
Strother not make rain with as many clients (or potential clients) as possible
when the opportunity presented itself (whether or not existing retainers
required him to do so)? The unfortunate inference is that Strother did not
tell Monarch because he did not think it was in his personal financial interest
to do so.
4. Davis Did Not Participate in Strother’s
Disabling Conflict of Interest
71
As discussed, Strother did not advise Davis of his January 1998
deal with Darc until August 1998, and even then he did so inaccurately. On the
basis of what Davis was told, Davis’s managing partner instructed Strother not
to exercise the “option” to acquire an interest in Sentinel. Whatever
financial arrangement Strother had with Darc and Sentinel, Davis was not aware
of it or a party to it.
72
The conversation between Strother and McLeod, mentioned earlier,
is not sufficient to implicate either McLeod or the firm in that breach.
Monarch claims that 28 of the same Davis lawyers and students that worked on
Sentinel Hill in 1998-1999 had previously worked on Monarch from 1993-1997; and
11 lawyers worked on both Monarch and Sentinel in 1998. Moreover, Monarch
points out that several partners and senior officers at Davis appear to have
had some level of knowledge about Sentinel, such as McLeod (the “commercial
partner in charge” (BCCA #2, at para. 6)), Mr. Elischer (Davis’s managing
director (BCCA #2, at para. 8)), and, by the summer of 1998, Mr. Buchanan
(Davis’s managing partner (BCCA #2, at para. 10)). However, there is no
evidence that any of these people were aware of Strother’s personal financial interest
before August 1998, at which point it was forbidden.
73
Monarch’s failure to establish knowledge on the part of other
Davis partners of the circumstances giving rise to the conflict is crucial to
an assessment of their potential liability as fiduciaries. The Davis firm was
as much an innocent victim of Strother’s financial conflict as was Monarch.
However, though not party to Strother’s breach of fiduciary duty, Davis may
still be vicariously liable for Strother’s “wrongful act” under s. 12 of the Partnership
Act, as will be discussed.
D. Fiduciary Remedies
74
This Court has repeatedly stated that “[e]quitable remedies are
always subject to the discretion of the court”. See, e.g., Wewaykum Indian
Band v. Canada, [2002] 4 S.C.R. 245, 2002 SCC 79, at para. 107; Hodgkinson
v. Simms, [1994] 3 S.C.R. 377, at p. 444; Canson Enterprises Ltd. v.
Boughton & Co., [1991] 3 S.C.R. 534, at pp. 587-89, and Côté, at
paras. 9-14. In Neil, the Court stated emphatically: “It is one thing
to demonstrate a breach of loyalty. It is quite another to arrive at an
appropriate remedy” (para. 36).
75
Monarch seeks “disgorgement” of profit earned by Strother and
Davis. Such a remedy may be directed to either or both of two equitable
purposes. Firstly, is a prophylactic purpose, aptly described as
appropriating
for the benefit of the person to whom the fiduciary duty is owed any
benefit or gain obtained or received by the fiduciary in circumstances where
there existed a conflict of personal interest and fiduciary duty or a
significant possibility of such conflict: the objective is to preclude the
fiduciary from being swayed by considerations of personal interest.
(Chan v. Zacharia (1984), 154 C.L.R. 178, per Deane J.,
at p. 198)
76
The second potential purpose is restitutionary, i.e. to
restore to the beneficiary profit which properly belongs to the beneficiary,
but which has been wrongly appropriated by the fiduciary in breach of its
duty. This rationale is applicable, for example, to the wrongful acquisition
by a fiduciary of assets that should have been acquired for a beneficiary, or
wrongful exploitation by the defendant of the plaintiff’s intellectual
property. The restitutionary purpose is not at issue in the case of Strother’s
profit. The trial judge rejected Monarch’s claim that Darc usurped a corporate
opportunity belonging to Monarch (paras. 128, 179 and 187). This finding was
upheld on appeal (para. 73).
77
The concept of the prophylactic purpose is well summarized
in the Davis factum as follows:
[W]here a conflict or significant possibility of conflict existed
between the fiduciary’s duty and his or her personal interest in the pursuit or
receipt of such profits . . . equity requires disgorgement of any profits
received even where the beneficiary has suffered no loss because of the need to
deter fiduciary faithlessness and preserve the integrity of the fiduciary
relationship. [Emphasis omitted; para. 152.]
Where, as
here, disgorgement is imposed to serve a prophylactic purpose, the relevant
causation is the breach of a fiduciary duty and the defendant’s gain (not the
plaintiff’s loss). Denying Strother profit generated by the financial interest
that constituted his conflict teaches faithless fiduciaries that conflicts of
interest do not pay. The prophylactic purpose thereby advances the
policy of equity, even at the expense of a windfall to the wronged beneficiary.
1. Monarch’s Claims
78
I proceed to consider the claims for disgorgement made by Monarch
against Strother and Davis:
(a) All legal fees paid by Monarch since
1993;
(b) all legal fees paid by Darc and
Sentinel to Davis;
(c) all profits earned by Strother.
I will address
each in turn.
(a) Legal Fees Paid by Monarch
79
A causal relationship between the breach of fiduciary duty and
the profits is required in order for an accounting to be ordered. Monarch paid
approximately $85,000 to Davis in legal fees during 1998. Monarch’s claim for
the return of these fees rests on the proposition that Davis earned these
profits in consequence of Strother’s failure to advise Monarch properly or
refer it elsewhere. The Court of Appeal ordered “that Davis must return to
Monarch all fees (not including disbursements) paid by it from and after
January 1, 1998” (BCCA #2, at para. 56).
80
Davis charged Monarch for general corporate services and
“clean-up” work on prior transactions. This work was not tainted and I would
not order a return of such fees charged to Monarch in 1998 or 1999. However,
to the extent Strother personally made a profit under the Davis firm allocation
process attributable to hours docketed to Monarch’s account, or to fees paid to
the firm by Monarch, such profit (earned at a time when Strother was in a
position of conflict, and derelict in his duty to Monarch) should form part of
Strother’s accounting to Monarch.
81
As Davis committed no breach of fiduciary duty to Monarch, and is
not responsible for Strother’s breach as discussed below, there can be no order
for equitable relief against Davis in this or other respects.
(b) Legal Fees Paid by Sentinel to Davis
82
The Court of Appeal ordered Davis to “account for and disgorge
the profits it earned from acting for Sentinel Hill in breach of its duty to
Monarch from and after January 1, 1998” (BCCA #2, at para. 50). Newbury J.A.
added:
I am not persuaded there is any principled reason for a cut-off of such
accounting as of the date Monarch withdrew from Davis’s clientele . . . in a
very real sense, all the fees earned by the firm thereafter [late 1997 or early
1998] from Sentinel Hill were rooted in Mr. Strother’s (and hence Davis’s) preparation
of the ruling request. For similar reasons, a cut-off date as of March 1999
when Mr. Strother left Davis must also be rejected, in my view: the foundation
for the firm’s substantial fees had been laid the previous year.
83
In my view, with respect, there was no Neil-type conflict known
to Davis that prevented it from acting for both Sentinel and Monarch. The
legal fees paid by Sentinel to Davis cannot therefore be said to be “in
consequence” of breaches of fiduciary duties owed by Davis to Monarch. My
conclusion on this point differs from that of the Court of Appeal because in my
view it was not a breach of fiduciary duty for Davis to take on Sentinel as a
client. Profits earned by Davis on the fees paid by Sentinel were a result of
Davis properly accepting the Sentinel retainer and Davis lawyers providing the
legal services for which the fees were charged. The profits were produced by
the skill and expertise of the lawyers at Davis who worked on the Sentinel
files. The result well might be different had it been a breach for Davis and
Strother to take on Sentinel as a client, but that issue does not arise here.
(c) Profits Earned by Strother
84
The expert’s final report on the entitlement of Strother and Darc
to financial benefits from Sentinel Hill established that the share for the two
of them was $4,132,131 in 1998 and $22,818,028 in 1999.
85
Strother must account for profit earned from the personal financial
opportunity he pursued in breach of his fiduciary duty to Monarch. Whatever
form his ongoing relationship or understanding with Sentinel took after August
1998, he had sowed the seeds of Sentinel’s success before that date and reaped
his reward when the harvest ripened in 1999 and 2000. Sentinel advanced
Strother almost $1 million in February and early March 1999. This was before
Strother resigned from the Davis firm on March 31, 1999.
86
Strother characterizes these advances as “loans” which were set
off against management fees that serendipitously became payable to Strother
later that year. Monarch contends it was Strother’s share of the profits
earned on the transactions that Sentinel had closed. The fact is that Strother
received $1 million. Even as a “loan” that was a significant benefit. The
money was in fact never repaid. If the prophylactic purpose of the equitable
remedy is to be achieved, Strother cannot be permitted to pocket the money thus
derived from a personal interest in conflict with his fiduciary duty.
87
Once it is determined that Strother must disgorge profits related
to his breaches of loyalty to Monarch, and is therefore subject to an
accounting in that regard, it is also necessary to determine whether the period
during which Strother should be obliged to account extends beyond the date when
the tax ruling was made public (October 6, 1998). A further issue on remedy is
Strother’s request for an apportionment of whatever profits are awarded. His
counsel points out, correctly, that “[e]ven where it is found that profits have
been derived from a breach, they may nonetheless be apportioned . . . depending
on the extent to which the profits are attributable to the breach” (Strother
factum, at para. 132). I will deal first with the issue of a cut-off date and
then return to the question of apportionment.
2. The “Accounting Period” Defined
88
The Court of Appeal, despite its observation that the accounting
remedy itself should not become “an instrument of injustice” (BCCA #1, at para.
52), nevertheless concluded that the “accounting period” should be open-ended:
After much anxious consideration, I have therefore
concluded that Mr. Strother must be required to account for and disgorge to
Monarch all benefits, profits, interests and advantages he has received or
which he may hereafter be entitled to receive, directly or indirectly
(i.e., through a corporation, trust, or other vehicle), from or through any of
the Sentinel Hill Entities. [Emphasis added.]
(BCCA #1, at para. 61, per Newbury J.A.)
An accounting
of profits is an equitable remedy and, as La Forest J. noted in a different
context:
. . . equity is not so rigid as to be susceptible to being used as a
vehicle for punishing defendants with harsh damage awards out of all proportion
to their actual behaviour.
(Hodgkinson, at p. 444)
89
To the same effect, the High Court of Australia noted in Warman
International Ltd. v. Dwyer (1995), 128 A.L.R. 201, at pp. 211-12:
. . . the stringent rule requiring a fiduciary to account for profits
can be carried to extremes and . . . in cases outside the realm of specific
assets, the liability of the fiduciary should not be transformed into a vehicle
for the unjust enrichment of the plaintiff.
In Warman
itself, the Court found that two years was the appropriate period for which
defendants should be ordered to account. From the profits so determined, an
allowance for the expenses, skill, expertise, effort and resources contributed
by the defendants was to be deducted.
90
In my view, a “cut off” is appropriate in this case as well. At
some point, intervention of other events and actors (as well as the behaviour
of the claimant) dissipates the effect of the breach. A number of cut-off
dates are suggested:
(i) the date the advance tax ruling was
issued (October 6, 1998) plus a reasonable time for Monarch to put its house in
order to pursue tax-assisted film production services opportunities;
(ii) the date Monarch actually learned of
the tax ruling (February or early March 1999) plus time to put its house in
order, etc.;
(iii) the date Monarch fired Davis (on or
about March 8, 1999, when Monarch sent a claim letter to Davis);
(iv) the date Sherman and other participants
in the Sentinel group transformed Darc’s original structure into its eventual
highly profitable form in the late spring of 1999;
(v) the date Strother left Davis and ceased
to have a solicitor-client relationship with Monarch (March 31, 1999);
(vi) the date Monarch ceased serious efforts
to get back into the tax-assisted film production services business in
September 1999.
91
By failing to advise Monarch, or at the very least to refer it
elsewhere in the spring of 1998, Strother pursued his own interest and denied
Monarch the timely opportunity to find new counsel and advance the possibility
of reviving in modified form its tax-assisted film production services
business. Further, in October 1998, Strother failed to advise his client of
the tax ruling when it was made public. Strother denies that Monarch would
have benefited from the opportunity even if it had been offered in a timely
way, but the evidence is that Monarch did try to get back into the
tax-assisted film business through another law firm once it found out about the
Sentinel ruling, as noted by the trial judge (paras. 33 and 182). By September
1999, Monarch’s new tax counsel, Allan Beach, had prepared a structure that
could have been used to obtain a tax ruling. However, the trial judge found
that after September 1999, Monarch did not proceed with serious diligence
(para. 182). By that time, of course, Strother had long since left the Davis
firm (March 1999) thus terminating the conflict.
92
I now propose to consider which of the options represents the
most appropriate cut off.
93
The advance tax ruling became public shortly after it was issued
on October 6, 1998. Counsel to Monarch’s former competitors seized upon it,
advised their clients, and began developing structures to re-enter the market.
However, Strother was counsel to Monarch and said nothing. As the evidence
indicated, the silence was deliberate at a time when his financial interests
were now aligned with Sentinel. In the absence of that conflict it is
difficult to believe that Strother, as an experienced and successful rainmaker
for the Davis firm, would not have picked up the telephone and called Monarch
to give them the good news and correct the earlier negative advice he had
provided. At least by the time the ruling became public, whatever the duty of
confidentiality Strother believed he owed to Sentinel in relation to the
prospective ruling had disappeared.
94
Bradley Sherman became a consultant to Sentinel in February
1999. The trial judge found that Sentinel would not have been as successful as
it became without his innovations. At some point, profits earned by Strother
were attributable in substantial part to Sherman’s business acumen and
Sentinel’s later affiliation with Alliance. Disgorgement of that money to
Monarch would be punitive, not prophylactic.
95
In my view, the prophylactic purpose would be served if Strother
is required to account to Monarch for all monies (including the $1 million
“loan” which should be treated as monies beneficially received by Strother on
the date “loaned”) received during or attributable to his period with Davis
between January 1, 1998 and March 31, 1999. At that point, both Monarch and
Strother had severed their links with Davis. The conflict was spent.
3. Should Strother’s Profit Be Apportioned?
96
In my view, this is not a case for apportionment. The Court’s
purpose here is prophylactic rather than restitutionary. We are not therefore
engaged in allocating an amount of profit amongst different contributing
sources (or “profit drivers”). Strother acquired a personal financial interest
in one client that conflicted with his duty to provide full and candid advice
to another concurrent client. He should not be permitted to profit from that
conflicting interest even though it is justly said that his own skill and
experience were major contributors to those profits. Apportionment in these
circumstances would reward the breach and undermine achievement of the prophylactic
purpose.
4. Strother May Be Entitled to Reasonable
Deductions
97
Monarch is awarded, within the limits stated above, “profits”.
From whatever portion of profit is awarded to Monarch should be deducted, if
established, Strother’s reasonable and necessary expenses incurred by him to
earn the profit: MacMillan Bloedel Ltd. v. Binstead (1983), 22 B.L.R.
255 (B.C.S.C.), at p. 294. The parties have agreed that such deductions are to
be determined in a post-trial reference.
5. Is Davis Liable for Strother’s Fiduciary
Breach and if so to What Extent?
98
I have already concluded that Davis did not breach its fiduciary
duty to Monarch. The Davis partners were innocent of Strother’s breach. The
firm cannot be held to have breached a fiduciary duty on the basis of facts of
which its partners were ignorant. Nevertheless, Monarch claims that Davis is
vicariously liable for Strother’s personal profits. This aspect of the claim
was rejected by the Court of Appeal on the basis that Strother was “on a frolic
of his own” (BCCA #2, at para. 42). Newbury J.A. concluded that:
. . . the partners of Davis were not shown to have known of, or to have
been wilfully blind to, or reckless regarding, Mr. Strother’s taking an
interest in Sentinel Hill. When Mr. Strother informed his firm of a supposed
option, the managing partner clearly forbade his having any interest,
and he appeared to accept that direction. Whilst in hindsight it might be said
the firm should have been alerted to the possibility that Mr. Strother would
nevertheless proceed to take (or retain) an interest, the authorities are clear
that the test is not an objective one. [Emphasis in original; BCCA #2, at
para. 63.]
99
I agree that not only was Davis unaware of Strother’s financial
interest but Davis had no reason to think that Strother had failed to comply
with the managing partner’s direction not to take an interest in Sentinel.
Nevertheless, Monarch contends that even in the absence of direct fault on the
part of Davis and its partners, it is entitled to a statutory recovery under
the following provisions of the B.C. Partnership Act:
11 A partner in a firm is liable jointly
with the other partners for all debts and obligations of the firm incurred
while he or she is a partner, and after his or her death his or her estate is
also severally liable in a due course of administration for those debts and
obligations, so far as they remain unsatisfied, but subject to the prior
payment of his or her separate debts.
12 If, by any wrongful act or omission
of any partner acting in the ordinary course of the business of the firm or
with the authority of his or her partners, loss or injury is caused to any
person who is not a partner in the firm or any penalty is incurred, the firm is
liable for that loss, injury or penalty to the same extent as the
partner so acting or omitting to act.
.
. .
14 A partner is jointly and severally
liable with his or her partners for everything for which the firm, while he or
she is a partner in it, becomes liable under either section 12 or 13.
Monarch’s
claim in this respect extends both to Strother’s profit under his arrangement
with Darc/Sentinel as well as Strother’s share of the Davis profits from
billings to Monarch. The claim is purely statutory.
100
The words “wrongful act or omission” in s. 12 are broad enough to
embrace an equitable wrong. There is nothing in the language of s. 12 to
confine vicarious liability to common law torts: McDonic Estate v.
Hetherington (Litigation Guardian of) (1997), 31 O.R. (3d) 577 (C.A.), at
p. 580; Dubai Aluminium Co. v. Salaam, [2003] 2 A.C. 366 (H.L.), at p.
375.
101
The legislature has imposed liability where “loss or
injury is caused”. The trial judge found that Monarch had not proven that
Strother’s breaches of fiduciary duty had caused it financial loss, but Monarch
certainly suffered injury by being denied the legal advice to which it
was entitled, and the compensation at issue was awarded in relation to that
injury. Section 12 differentiates between a “loss” and an “injury”. The
legislature has said that a “loss” is not necessary to ground recovery under s.
12. An injury without loss is sufficient.
102
What then is the nature and extent of the innocent partners’
liability? The firm is liable “for that loss, injury or penalty”. The
inclusion of a “penalty” in s. 12 indicates that even statutory impositions are
included (Dubai Aluminium, at para. 103). The combination of
“loss, injury or penalty” suggests that the legislative purpose is to ensure that
a delinquent partner’s liability incurred “to any person who is not a partner”,
with the firm’s authority or in the ordinary course of the firm’s business, is
to be treated as the obligation of the firm regardless of its legal origin. A
money judgment resulting from an accounting of profits against the delinquent
partner comes within this description, in my opinion.
103
Davis argues that where a partner’s fault has not occasioned
economic loss to the client, and the accounting of profit is imposed for prophylactic
rather than restitutionary purposes, vicarious liability serves no useful
purpose. Davis argues:
The rule is intended to deter and not to punish. It
seeks to deter fiduciaries from breach of their duty by making them aware that
they cannot retain any profit made thereby, thus removing any incentive to
disloyalty. That purpose can be achieved only when the fiduciary [i.e., the
other partners] is sufficiently knowledgeable of the facts on which breach of
duty is alleged to realize that a breach has occurred, or may occur.
(Davis factum, at para. 154)
This argument
is persuasive as a matter of equity but at this point Monarch is demanding a statutory
remedy. Nowhere in s. 12 is it suggested that prior knowledge of the
delinquency by the other partners is a condition precedent to liability. On
the contrary, proof of prior knowledge by the partners would raise questions of
direct liability and, if found, would render unnecessary resort to vicarious
liability under s. 12 of the Partnership Act. It is in the nature of
vicarious liability under s. 12 that the firm may be innocent of any fault
other than the misfortune of having on board a rogue partner at the time of his
or her delinquency.
104
Monarch must still show that Strother acted “with the authority
of his or her partners” or “in the ordinary course of the business of
the firm” (s. 12).
105
Clearly, Strother did not act “with the authority” of his
partners. The more difficult question is whether it can be said that
Strother’s wrongful act was “in the ordinary course of the business” of Davis.
The Court of Appeal held that it was not, but I do not think that such a
conclusion is consistent with the now well-established principles of vicarious
liability established in Bazley v. Curry, [1999] 2 S.C.R. 534, and
applied in cases such as Jacobi v. Griffiths, [1999] 2 S.C.R. 570; E.D.G.
v. Hammer, [2003] 2 S.C.R. 459, 2003 SCC 52; K.L.B. v. British Columbia,
[2003] 2 S.C.R. 403, 2003 SCC 51; Blackwater v. Plint, [2005] 3 S.C.R.
3, 2005 SCC 58, and E.B. v. Order of the Oblates of Mary Immaculate in the
Province of British Columbia, [2005] 3 S.C.R. 45, 2005 SCC 60. In Dubai
Aluminium, the House of Lords, at para. 23, referred with approval to the
principles of vicarious liability set out by McLachlin J. in Bazley as
an aid to the interpretation of the English equivalent of s. 12. These
principles were summarized by McLachlin J. (as she then was) in Bazley,
at paras. 37 and 41, as follows:
. . . the policy purposes underlying the imposition of vicarious
liability on employers are served only where the wrong is so connected with the
employment that it can be said that the employer has introduced the risk of the
wrong (and is thereby fairly and usefully charged with its management and
minimization).
.
. .
Vicarious liability is generally appropriate where there is a
significant connection between the creation or enhancement of a risk and
the wrong that accrues therefrom, even if unrelated to the employer’s desires.
Where this is so, vicarious liability will serve the policy considerations of
provision of an adequate and just remedy and deterrence. [Emphasis in
original.]
Section 12 of
the Partnership Act should be interpreted in a manner consistent with
these principles. The “ordinary course of the business” test thus requires
Strother’s wrong to be “so connected” with the partnership business that it can
be said that Davis introduced the risk of the wrong that befell its client
Monarch and is thereby fairly and usefully charged “with its management and
minimization”.
106
While, of course, the Court of Appeal is correct that acceptance
of personal financial benefits by a rogue partner was not in the ordinary
course of the business of Davis, the fact is that the wrongful act in this case
was “so connected” with Davis’s ordinary business that it led to a contractual
breach of Monarch’s retainer of Davis. Both Monarch and Sentinel
retained Davis to provide professional services. Darc did not approach
Strother in January 1998 to do a little frolic on the side. The January 30,
1998 memo between Darc and Strother called for the provision by the Davis firm
of legal services, e.g.:
Davis & Company will form two limited partnerships and two
corporations as the initial entities which will be used in the
structure. . . .
Davis & Company will apply for an advance income tax ruling, the
application for which will be supported by draft agreements, reviewed by you
and the participating film or television studio (likely a Viacom
entity). . . .
.
. .
If we are successful in obtaining an advance income tax ruling from
Revenue Canada, we will retain Davis & Company to prepare and file an offering
memorandum and prepare relevant transaction documents to effect a syndication
offering to implement the transactions described in the ruling. . . .
(Monarch’s A.R., at pp. 888-89)
107
As to Monarch, the provision of timely and candid legal advice
was the essence of the retainer. Davis’s failure to perform this retainer
properly is explicable, as Newbury J.A. found, by Strother’s decision to keep
Monarch “in the dark”, which resulted from his conflicting personal financial
interest. It is not possible, in my view, to disentangle Strother’s wrongful
act from the “ordinary business” of Davis so as to hold that Strother was off
“on a frolic of his own”. In these circumstances the “twin objectives” of
compensation of the wronged client and deterrence of faithless fiduciaries will
generally be furthered by vicarious liability, e.g., by encouraging greater
vigilance by other partners, even though in some cases (as here) it may be
difficult to know what more the other partners ought to have done to keep Strother
out of trouble.
108
If Davis is called on to pay monies to Monarch on the basis of
vicarious liability, Davis will no doubt seek to claim indemnity from
Strother. If, in the circumstances, the claim is allowed and the rogue partner
can pay, the firm is protected. If the rogue partner cannot pay, the
legislature has decided that there is no good reason why the loss or injury
should be inflicted on the innocent client rather than on the partnership which
put the rogue partner in a professional position to do what he or she did.
6. Abuse of Monarch’s Confidential
Information
109
It is common ground that while Davis and Strother were free to
put their legal skills at the service of their other clients, they could not in
doing so make use of information provided in confidence by Monarch (or, for
that matter, Sentinel).
110
The Court of Appeal agreed with the trial judge that “no real
element of confidentiality had been proven by Monarch as inherent in the
transactional documents created by Davis for Monarch and that Monarch had not
succeeded in establishing a breach of confidence ‘based on similarity of
documentation alone’” (BCCA #2, at para. 62). However, it did conclude with
respect to Monarch’s “production services deal memo” (or as it was later
called, the “Production Services Agreement”) that
some of the clauses in the Sentinel Hill documents are almost
identical. In respect of this document as well, the evidence seems clear that
it originated with Mr. Cheikes, as Mr. Darc admitted using the “Production
Services Agreement” to create Monarch documents before leaving that company’s
employ.
(BCCA #2, at para. 60)
111
The Court of Appeal went on to conclude that “the production
services deal memorandum of Sentinel Hill had its genesis in the ‘Cheikes
package’ of documents” (BCCA #2, at para. 61). In my view, with respect, it
is not enough to show that a particular transaction document has its “genesis”
in a prior transaction document. Recycling precedents is the life-blood of
corporate law practice. A document prepared for Client A is part of the
lawyer’s work product and may go through numerous iterations in the service of
other clients. The practice of law would be hopelessly inefficient and costly
for clients if transactional documents had to be reinvented rather than
customized. Provided confidential information is not employed, it seems to me
that Monarch cannot complain on this account. I would not give Monarch relief
on the basis of the genesis of a document where the successor document does not
itself disclose confidential information of the claimant contained in the
earlier document.
E. Monarch’s Cross-Appeal Against Paul Darc
112
I would dismiss Monarch’s claim against Darc for the reasons
given by Newbury J.A.
V. Disposition
113
I would dismiss the Strother appeals against the finding that, in
1998, Strother put himself in a position of conflict between his duty to
Monarch and his personal financial interest. To further this interest, he
failed to provide Monarch in 1998 with the legal advice to which Monarch was
entitled. With respect to remedy, the Strother appeals are allowed in part.
Strother must account to Monarch for the personal profit gained directly from
the Sentinel group and indirectly through his earnings as a Davis partner on
account of billings to Monarch, but only for the period January 1, 1998 to
March 31, 1999. As agreed by the parties, a reference is directed to determine
the appropriate calculation of Strother’s profit. Monarch is to have a money
judgment against Strother in the sum thus ascertained.
114
The appeal by Davis against the decision of the Court of Appeal
is allowed in part. Davis committed no breach of fiduciary duty to Monarch and
is not liable for Strother’s breaches of fiduciary duty, of which its partners
are innocent, except under the terms of s. 12 of the Partnership Act.
The liability of Davis is limited to vicarious liability for the sum found to
be due by Strother to Monarch under the preceding paragraph.
115
Monarch’s cross-appeal is dismissed with costs.
116
Except as aforesaid, all parties and the intervener will bear
their own costs in light of the divided success.
The reasons of McLachlin C.J. and Bastarache, LeBel and Abella JJ. were
delivered by
The Chief Justice
(dissenting in part on the appeals) —
I. Introduction
117
It is fundamental to the practice of law that a lawyer acts for
many clients. It is equally basic that specialized lawyers act for many
clients in the same line of business, some of whom may be competitors. Lawyers
and law firms are permitted to act for multiple clients in the same line of
business, provided they avoid conflicts of interest.
118
The issue before us is whether, on the facts of this case, a
conflict arose. Justice Binnie concludes that it did, and holds as a
consequence that the lawyer, Mr. Robert C. Strother, must pay to his first
client, Monarch, a significant portion of the money he earned with the second
client. I respectfully disagree. In my view, whether a conflict between two
clients exists is dependent on the scope of the retainer between the lawyer and
the client in question. The fiduciary duties owed by the lawyer are molded by
this retainer, as they must be in a world where lawyers represent more than one
client.
119
The trial judge made clear findings of fact as to the limited
scope of the retainer between Davis and Monarch ((2002), 26 B.L.R. (3d) 235,
2002 BCSC 1179, at paras. 10 and 106-8), and on this basis concluded that no
conflict arose when Strother took on a second client in the same line of
business. It is not open to this Court to revisit the trial judge’s findings,
absent a palpable and overriding error. There are no such errors. Nor is it
open to us to superimpose a broad fiduciary obligation independent of and
inconsistent with the retainer. It follows that the trial judge’s conclusion
that no conflict arose should be upheld and Strother’s appeals allowed. I would
dismiss the cross-appeal.
II. Background
120
The Income Tax Act, R.S.C. 1985, c. 1 (5th Supp .),
in the 1990s permitted tax-sheltered investments in Canadian-made films.
Monarch established a business putting together film makers and investors who
wished to take advantage of such tax shelters. Strother, a tax lawyer in the
firm Davis & Company, a partnership (also referred to as “Davis”), acted as
Monarch’s lawyer in connection with this business; indeed, in the mid-90s
Monarch was Strother’s biggest client.
121
Effective October 1997, the government ended the tax-shelter
scheme by introducing new Matchable Expenditures Rules. Strother advised
Monarch that he saw no way to get around these rules. He had no technical fix,
and even if he could devise one, he did not consider that any advance tax
ruling could be obtained, given the new rules. This advice was consistent with
advice being given by other tax lawyers to other clients at the time. The
trial judge found that the advice Strother gave Monarch at the end of 1997 was
correct at the time and that Strother “concealed nothing from Monarch in 1997
in order to take a benefit for himself” (para. 91).
122
Monarch wound down its business. Its exclusive written retainer
with Davis ended as of December 31, 1997 and was not renewed. That retainer
had been a comprehensive written document addressing all aspects of the legal
services Davis was to provide to Monarch. It required Strother to stay
apprised, and to keep Monarch apprised, of all legal developments that could
affect Monarch’s ability to continue to promote tax-assisted film production
services, and remunerated him for this duty. The new retainer was, as the trial
judge put it, “decidedly different” (para. 104).
123
The trial judge made the following specific findings on the terms
of the new retainer between Davis and Monarch. It did not provide for ongoing
remuneration. Strother was to provide advice to Monarch only if Monarch
specifically asked for it, and only if Strother agreed to provide it. Strother
was free to act for competitors and was not obliged to disclose any information
of a competitive nature to Monarch.
124
Throughout 1998 and into 1999, Davis & Company performed
“clean-up” and corporate services for Monarch, for which it was paid
approximately $98,000. Monarch’s executives testified that they relied on
Strother during this period to advise if there was a way around the new rules.
The trial judge held, however, that under the narrow 1998 retainer, Strother
was under no on-going duty to provide Monarch with any advice on these
matters. The trial judge saw Strother’s fiduciary duty as tied to the limited
duties imposed by the retainer. In his view, Strother’s fiduciary duty “did not
serve to broaden his contractual duty in the sense of requiring him to give
advice or [to] provide information beyond what his firm’s retainer required”
(para. 45).
125
In late 1997 or early 1998, a new client, Mr. J. Paul Darc, a
former employee of Monarch, approached Strother with a new idea that he had
come up with on his own for a film production tax-shelter business that he
believed might not be barred by the government’s new rules. The trial judge
found that the limited terms of the Davis-Monarch retainer at this time permitted
Strother to take Darc on as a new client and to act for his company, Sentinel
Hill Entertainment Corporation (“Sentinel Hill” or “Sentinel”), and that
Strother was not obliged to advise Monarch of anything he learned from this new
client. While skeptical of Darc’s idea (the trial judge found Strother
honestly believed the film production tax-shelter business dead for good),
Strother agreed to help Darc. In lieu of fees, Strother agreed to take a
percentage of any profit. Strother drafted a proposal based on Darc’s idea and
submitted it in the name of Sentinel Hill to Revenue Canada in March 1998.
126
In October 1998, Revenue Canada responded to the Sentinel Hill
proposal with a favourable ruling, followed by a further ruling addressing
studio concerns in December 1998. Acting on these rulings, Sentinel Hill
closed $260 million in studio production transactions by the end of 1998.
Strother’s involvement with Sentinel’s business led to his leaving Davis &
Company as of March 31, 1999. Ultimately, Strother’s share of Sentinel’s
profits appears to have been about $32 million.
127
Strother never told Monarch about Darc’s idea. Monarch learned of
the favourable tax ruling obtained by Sentinel four months after its issuance.
The trial judge found that even if Monarch had been told of the new
possibility, it would not have re-entered the film production tax-shelter
business in 1998. Monarch was less competitive than others at the time, in
part because it had dismantled its operations. The trial judge found that
Monarch’s claim was essentially based on hindsight.
128
Monarch’s case rests on its contention that it continued to look
to Strother for advice on film tax shelters in late 1997 and up to September
1998. The trial judge accepted that there were some conversations between
Strother and Monarch’s principals, Harry Knutson and Stephen Cheikes, in this
period. However, consistent with his finding that Monarch had effectively
wound up its film production tax-shelter business, he concluded the
conversations related to other kinds of business. Because they are critical to
the case, I set out the trial judge’s findings on the issue:
What was said at the meetings in 1997 and 1998 was
obviously said in the context of the government’s termination of tax shelters
and of Monarch having stopped doing that business in the same way as had both
Grosvenor Park and Alliance. In other words, Mr. Knutson and Mr. Cheikes were
not consulting Mr. Strother for advice on the Rules that had put an end to
their tax shelter business or to explore whether there was any possibility of
that business in some way being continued. They had no reason to do so and had
no expectation of receiving any advice in that regard. What they wanted to
know was whether Monarch could do anything else apart from tax-sheltered
financing. Mr. Strother says that, in general terms, the focus of the
meetings he had with Mr. Knutson in January was to consider what Monarch might
do, and Mr. Knutson says that it was not until the end of January that he was
able to get Mr. Strother to sit down and focus on talking about new business
opportunities. The subject of tax-shelter financing never arose. The only
real advice Mr. Strother appears to have given was with respect to the loss-co
idea. He was not asked to advise on tax-shelters and he did not do so.
[Emphasis added; para. 100.]
129
Monarch sued Strother and Davis & Company for breach of
fiduciary duty and breach of confidence. (Other claims and counter-claims need
not be considered here.) The trial judge dismissed these claims on the basis of
the 1998 Davis-Monarch retainer, and on the basis that nothing confidential to
Monarch had been used in services provided to Darc and Sentinel Hill.
130
The Court of Appeal, per Newbury J.A., allowed Monarch’s
appeal in part ((2005), 38 B.C.L.R. (4th) 159, 2005 BCCA 35). It held that the
trial judge erred in holding that Strother’s duty did not extend beyond what
the firm’s retainer required. Since Monarch was still a client of the firm,
Strother had an ongoing duty to advise Monarch of any developments in the field
even under the narrow 1998 retainer. Taking Darc and Sentinel on as clients
thus resulted in a conflict of interest: he had a duty to Monarch to tell it
about Darc’s idea, and a duty to Darc and Sentinel not to do so. In the
court’s view, the trial judge’s conclusion that Monarch would likely not have
taken up the opportunity to re-enter the business, had it been advised of the
possibility in 1998, did not prevent recovery of equitable remedies against
Strother for breach of his fiduciary duty. The court ordered disgorgement to
Monarch of all benefit and profit, direct and indirect, received from
Sentinel Hill.
III. Analysis
131
In my view, the Court of Appeal erred in holding that Strother’s
duty to Monarch extended beyond the terms of the 1998 retainer agreement with
Monarch, grounding an on-going duty to advise Monarch of any developments in
the film production tax-shelter business.
A. Strother’s Duty to Monarch
132
When does a conflict of interest arise? This is the question at
the heart of Strother’s appeals. The answer is that a conflict arises when a
lawyer puts himself or herself in a position of having irreconcilable duties or
interests: Hilton v. Barker Booth and Eastwood, [2005] 1 All E.R. 651
(H.L.); R. v. Neil, [2002] 3 S.C.R. 631, 2002 SCC 70. It follows that
the first question where conflict of interest is alleged is what duty the
lawyer owed to the client alleging the conflict. The second question is
whether the lawyer owed a duty to another client, or held a personal interest,
that conflicted with the first duty.
133
Turning to the first question, how is the fiduciary duty owed to
a particular client to be determined? In a case such as this, one looks to
the contract between the parties. As La Forest J. put it in Hodgkinson v.
Simms, [1994] 3 S.C.R. 377, at p. 407:
. . . many contractual agreements are such as to give rise to a
fiduciary duty. The paradigm example of this class of contract is the agency
agreement, in which the allocation of rights and responsibilities in the
contract itself gives rise to fiduciary expectations; see Johnson v. Birkett
(1910), 21 O.L.R. 319 (H.C.); McLeod v. Sweezey, [1944]
S.C.R.111; P. D. Finn, “Contract and the Fiduciary Principle” (1989), 12 U.N.S.W.L.J.
76.
A retainer
between lawyer and client is essentially an agency agreement, albeit a special
one attracting a duty of loyalty. The lawyer commits to doing certain things
for the client. It is to this commitment that the fiduciary duty of loyalty
attaches.
134
It follows that in a case such as this, one begins by asking what
the lawyer and client have agreed the lawyer will do and on what terms. Where
the retainer is written, one looks to the words of the retainer. Where it is
oral, one asks what the oral terms were. Sometimes, where duties are attached
to a task for which the lawyer is retained, but not precisely specified, it may
be a question of implying duties. Where, as here, the lawyer and the client do
not agree on the terms of the retainer, the trial judge must determine what
they are and the case must be judged on that basis unless a palpable and
overriding error is established. As Laskin C.J. stated, the nature and scope
of a lawyer’s retainer is “purely a factual question on which the findings of
the trial judge should not ordinarily be upset on appeal save for error arising
from misapprehension of the evidence” (Smith v. McInnis, [1978] 2 S.C.R.
1357, at pp. 1360-61). This is especially true where, as in this case, the
alleged breach is an ethical one. The inquiry is inherently fact-based, within
the domain of the trial judge.
135
The lawyer owes the client a duty to act loyally for the client
in performing as agreed in the retainer. The duty of loyalty is not a duty in
the air. It is attached to the obligations the lawyer has undertaken pursuant
to the retainer. It is not conflict of loyalties in the abstract that raises
problems, but conflicting duties — duties that are determined by the
retainer. The problem, to use the language of Hilton, arises
when the lawyer “has conflicting duties to two clients” (para. 44) and cannot
prefer one to the other — that in performing his “contractual duties” (para.
35) to one (or taking a personal interest in the matter), he will be in breach
of his contractual duties to the other.
136
Insistence on actual conflicting duties or interests based on
what the lawyer has contracted to do in the retainer is vital. If the duty of
loyalty is described as a general, free-floating duty owed by a lawyer or law
firm to every client, the potential for conflicts is vast. Indeed, it is
difficult to see how a lawyer or law firm could ever act for two competitors.
Consider, as in this case, a specialized tax lawyer who acts for client A and
B, where A and B are competitors. Client A may ask for help in minimizing capital
gains tax. Client B may seek advice on a tax shelter. The lawyer owes both A
and B contractual and associated fiduciary duties. If the duty that the lawyer
owes to each client is conceived in broad general terms, it may well preclude
the lawyer from acting for each of them; at the very least, it will create
uncertainty. If the duty is referenced to the retainer, by contrast, these
difficulties do not arise. The lawyer is nonetheless free to act for both,
provided the duties the lawyer owes to client A do not conflict with the duties
he owes to client B.
137
This manner of viewing a lawyer’s duties conforms to the
realities of the legal profession and the needs of clients. Modern commerce,
taxation and regulation flow together in complex, sometimes murky streams. To
navigate these waters, clients require specialized lawyers. The more
specialized the field, the more likely that the lawyer will act for clients who
are in competition with each other. Complicating this reality is the fact that
particular types of economic activity may be concentrated in particular
regions. The obligation of the legal profession is to provide the required
services. Yet in doing so, lawyers and law firms must inevitably act for
competitors.
138
Practical considerations such as these cannot be used to dilute
the rigor of the fiduciary duties that the law rightly demands of lawyers.
Rather, they explain why the law has developed a precise conception of the
lawyer’s duty grounded in the contract of retainer. Our law rightly imposes
rigorous fiduciary duties on lawyers, but it also recognizes the need to ensure
that fiduciary obligations remain realistic and meaningful in the face of the
realities of modern practice.
139
Binnie J., speaking for the Court, captured these realities when
he wrote in Neil, at para. 29:
. . . a bright line is required. The bright line is provided by the
general rule that a lawyer may not represent one client whose interests are directly
adverse to the immediate interests of another current client . .
. . [Emphasis added.]
140
Whether an interest is “directly” adverse to the “immediate”
interests of another client is determined with reference to the duties imposed
on the lawyer by the relevant contracts of retainer. This precision protects
the clients, while allowing lawyers and law firms to serve a variety of clients
in the same field. This is in the public interest. As Binnie J. observed in Neil,
at para. 15:
An unnecessary expansion of the duty may be as inimical to the proper
functioning of the legal system as would its attenuation. The issue always is
to determine what rules are sensible and necessary and how best to achieve an
appropriate balance among the competing interests.
141
This view of the matter does not conflict with the traditional
view of the fiduciary duty owed by lawyer to client. The fiduciary duty
between lawyer and client is rooted in the contract between them. It enhances
the contract by imposing a duty of loyalty with respect to the obligations
undertaken, but it does not change the contract’s terms. Rather, it must be
molded to those terms. The classic statement of Mason J. of the High Court of
Australia in Hospital Products Ltd. v. United States Surgical Corp. (1984),
156 C.L.R. 41, at p. 97, has been endorsed by the Privy Council in Kelly v.
Cooper, [1993] A.C. 205, at p. 215 (per Lord Browne-Wilkinson), and
in Hilton, at para. 30:
. . . the existence of a basic contractual relationship has in many
situations provided a foundation for the erection of a fiduciary relationship.
In these situations it is the contractual foundation which is all important
because it is the contract that regulates the basic rights and liabilities of
the parties. The fiduciary relationship, if it is to exist at all, must
accommodate itself to the terms of the contract so that it is consistent with,
and conforms to, them. The fiduciary relationship cannot be superimposed
upon the contract in such a way as to alter the operation which the contract
was intended to have according to its true construction. [Emphasis added.]
142
For these reasons, I conclude that the starting point in
determining whether a conflict of interest arose in a particular case is the
contract of retainer between the lawyer and the complaining party. The
question then is whether these duties conflicted with the lawyer’s duties to a
second client, or with his personal interests. If so, the lawyer’s duty of
loyalty is violated, and breach of fiduciary duty is established. This is the
position on the authorities which the courts must follow. This does not, of
course, preclude law societies from imposing additional ethical duties on
lawyers. They are better attuned than the courts to the modern realities of
legal practice and to the needs of clients. If the obligations of lawyers are
to be extended beyond their established bounds, it is for these bodies, not the
courts, to do so.
143
Here, the trial judge was correct to begin by asking what the
contract obliged Strother to do for Monarch. Whatever he undertook to do, he
was bound to do it with complete loyalty in accordance with his fiduciary
obligation. He could not acquire other duties to other clients or personal
interests that might conflict with his duties to Monarch under the retainer.
But by the same token, he was entitled to take on duties to other clients or
acquire personal interests that were not directly adverse to his duties to
Monarch, as defined by the firm’s contract of retainer with Monarch.
144
The trial judge, as discussed, found that after the end of 1997,
a new and limited retainer was in effect with Monarch. He found that the
retainer was “decidedly different” from what it was in 1997 in a number of
important respects. Monarch was completely out of the tax-shelter business and
the whole basis for the pre-1998 retainer had disappeared. There was no
contractual obligation for Strother to provide any advice to Monarch that was
not specifically sought and no longer any provision for Davis to be remunerated
for advice that was not specifically sought. Strother’s only duty on this
retainer was to do what Monarch specifically requested and what he, Strother,
agreed to take on. There was no duty to provide continuing advice on
developments of interest, and no provision for remuneration for being available
to provide such advice. There was no contractual requirement for Strother to
act exclusively for Monarch, and Strother was free to take on competing
clients.
145
The trial judge did not misapprehend the evidence and therefore
there is no basis to overturn his findings. Accepting the limited nature of
the Davis-Monarch retainer as found by the trial judge, the remaining question
is whether Strother’s obligation to Darc and Sentinel Hill, or his taking of a
personal interest in Sentinel Hill’s profits, directly conflicted with his
duties to Monarch. The trial judge correctly answered this question in the
negative. The retainer permitted Strother to take on new clients or interests.
Only if Monarch had specifically asked Strother for advice on new film
tax-shelter opportunities and Strother had agreed to give that advice, could
Strother have been under any duty to provide Monarch with such advice, placing
him in a conflict of interest with Sentinel Hill. On the trial judge’s
findings, these things never happened. Unlike Binnie J., I accept the trial
judge’s findings of fact and conclude that there was no conflict between what
Strother agreed to do for Monarch and what he was doing for Darc and himself
with Sentinel Hill. Given the changed nature of the lawyer-client
relationship, there is no reason to conclude that Strother’s capacity to
loyally and zealously perform the very limited duties owed to Monarch under the
1998 oral retainer would be affected by his taking a personal interest in
Sentinel Hill.
146
The findings of fact that compel this conclusion were open to the
trial judge and have not been impugned. The Court of Appeal was bound to
proceed on the basis of these findings, unless there was a palpable and
overriding error: Housen v. Nikolaisen, [2002] 2 S.C.R. 235, 2002 SCC
33. It purported to do so (para. 3). However, and with great respect, it went
on to commit critical errors. It held, in effect, that Strother owed Monarch
a duty of loyalty that extended beyond the retainer. Instead of asking what
duties Strother owed Monarch under the contract of retainer, it simply asked
whether Strother was “still acting for” Monarch when he went into business with
Sentinel Hill (para. 3). The Court of Appeal did not ask whether the actual
duties Strother owed to Monarch and to Sentinel Hill respectively,
conflicted, as the authorities discussed above required it to do. Rather, it
simply asked whether Strother and Davis were in some broad sense “acting for”
Monarch and Sentinel Hill at the same time. Nor, as required by the
authorities, did the Court of Appeal mold Strother’s duty of loyalty to the
terms of the contract of retainer; instead, it envisioned an abstract duty of
loyalty that would preclude lawyers acting for two competing clients, even
though the particular duties owed to each of them do not in fact conflict.
Grounding its reasoning in the wrong question and uprooting the duty of loyalty
from its contractual context, the Court of Appeal inevitably arrived at the
erroneous conclusion that Strother was in breach of his fiduciary duty to
Monarch.
147
In this Court, Binnie J. essentially concurs in this reasoning,
although he places greater emphasis on Strother’s interest in Sentinel Hill,
which in his view made Strother a competitor of Monarch, for whom he was “still
acting”. But the underlying difficulty is the same as in the Court of Appeal,
in my respectful opinion; the reasons do not ask whether there was a direct
conflict between Strother’s duties under his retainer with Monarch and what he
was doing, but rather whether there was a decontextualized potential or past
conflict.
148
Binnie J. seeks to deal with the trial judge’s findings on
Strother’s limited duties to Monarch by stating that the retainer was not
reduced to writing and suggesting that “no exclusions [were] agreed upon”,
leading him to conclude that “the scope of the retainer may be unclear” — a
situation in which one “should not . . . strain to resolve the ambiguities in
favour of the lawyer over the client” (para. 40). The trial judge erred in so
straining, he concludes (para. 41). But the trial judge expressly found that
exclusions were agreed upon, and found no ambiguity. Having made clear,
unambiguous findings as to the precise scope of the retainer, he can hardly be
accused of failing to resolve non-existent ambiguity in the wrong way. At the
end of the day, the trial judge’s findings of fact stand firm and unimpeached,
and must be accepted as the foundation of the case.
149
Binnie J. argues that it was wrong for Strother to take an
interest in a competitor’s business when his firm had worked for Monarch in the
past and, indeed, was still continuing to do “clean-up” work for Monarch. The
fact that Strother stood to make a great deal of money from the business
interest he took in Sentinel Hill might well raise a concern that his personal
interest might have led him to be less diligent than he should have been to potential
competitors like Monarch. Careful scrutiny is justified when a lawyer takes a
personal interest in a business in which a client was previously engaged.
Monarch’s difficulty is that the trial judge subjected Strother’s conduct to
this scrutiny, and found no fault in his dealings with Monarch. He found that
Strother had honestly and competently advised Monarch that there was no more
film production tax-shelter business to be had in the autumn of 1997. He found
that Strother believed this to be true, and that other advisers were giving the
same advice at the time. He concluded that “the origin of the Sentinel Hill
tax credit/shelter concept, which underlay its request for an advance tax
ruling based on the s. 15(b) exception, was substantially as described by Mr.
Darc and Mr. Strother” (para. 91) and that it was Darc’s novel idea, an idea
not previously contemplated by anyone. It was not until the tax ruling was
issued that Strother knew about the exception (para. 94). Finally, he found
that after the expiry of the retainer in 1997, Strother owed no duty to Monarch
to advise it of business opportunities, and that the only discussions he had
with Monarch related to other types of business, Monarch by then being out of
the film production tax-shelter business. The fact that Strother took an
interest in Darc’s business instead of charging fees, whether one approves of
this or not, does not change the trial judge’s finding that Strother completely
fulfilled his duty to Monarch and was free to engage in the new endeavour with
Darc and Sentinel Hill.
150
I conclude that the trial judge’s findings stand unimpeached and
that on the applicable law, he correctly concluded that Strother did not breach
his contractual or fiduciary duty to Monarch.
B. Remedy
151
The Court of Appeal ordered Strother to account for all profits
made as a result of his participation in Sentinel Hill. It based this on the
traditional order for accounts imposed by equity on a trustee who uses the
beneficiary’s property for his own interest, according to the general rule that
when “a fiduciary reaps a benefit as a result of a breach of the duty of
loyalty owed to the principal, an action for an accounting of profits will
lie”: P. D. Maddaugh and J. D. McCamus, The Law of Restitution (loose-leaf
ed.), at § 27:500.
152
The conclusion that Strother did not breach his contractual or
fiduciary duty makes it unnecessary to consider whether the Court of Appeal’s
remedy was appropriate. However, it may not be amiss to suggest that it is far
from clear that an accounting for profits is the appropriate remedy for the
breach alleged by Monarch. For the reasons that follow, and without deciding
the issue, I simply wish to register the caveat that the matter may not be as
free from doubt as the Court of Appeal assumed.
153
The trial judge, after a careful review of the evidence, found
that even if Strother had acted as Monarch contends he should have, and even if
Strother had never taken an interest in Sentinel Hill, Monarch’s position would
be the same as it is today. The alleged breach, even if it were made out,
caused Monarch no loss, since it would not have gone into the business in any
event. The question is whether the remedy of account and disgorgement of
profits is appropriate in a case where the breach did not arise from the
management of property, where it did not cause the plaintiff any loss, and
where viewing the same facts through the lens of contract law,
the plaintiff would have recovered nothing.
154
The first question is whether the remedy of account is
appropriate where the breach related not to the management of the plaintiff’s
assets, but to an opportunity that arises to him as trustee or fiduciary.
155
There is some doubt on this matter. It is clear that an
accounting for profits is available for breach of fiduciary duty in the classic
situation of the management of assets. “However, where the trustee’s profit is
not made out of the trust property but out of an opportunity that arises to him
in his office as trustee . . . many have questioned whether it is equitable or
fair that the trust beneficiaries should have a proprietary interest in that
profit (rather than a mere personal claim)” (D. Hayton, “Unique Rules for the
Unique Institution, the Trust”, in S. Degeling and J. Edelman, eds., Equity
in Commercial Law (2005), 279, at p. 284). Where a fiduciary uses the
plaintiff’s asset to make a profit for himself, the logic of the remedy of
account is clear; presumptively the profits the trustee earned would have been
earned for the plaintiff, but for the breach. The plaintiff is simply claiming
what is rightfully his. The link between the breach and the remedy of account
is arguably less clear where the breach involves using information or an
opportunity which the plaintiff would not have enjoyed in any event (as is the
case with the profit Strother earned from Darc’s idea). Moreover, as Hayton and
others have pointed out, the effect may be to give the plaintiff priority over
other creditors, should the trustee be insolvent, heightening the unfairness of
the remedy of account in these circumstances. See R. Goode, “Proprietary
Restitutionary Claims”, in W. R. Cornish et al., eds., Restitution: Past,
Present and Future (1998), 63, at p. 69; S. Worthington, Equity
(2003), at pp. 125-26. It thus may be questioned whether a non-proprietary
claim such as Monarch’s should attract the remedy of an account for profits.
156
This particular debate is part of a larger discussion throughout
the Commonwealth as to the role causation, and other limiting factors used at
common law should play in devising appropriate remedies for breach of equitable
or fiduciary duties, particularly where, as here, the fiduciary duty arises
from the same facts as a concomitant contractual duty. Underlying this debate
is the tension between the need to deter fiduciaries from abusing their trust
on the one hand, and the goal of achieving a remedy that is fair to all those
affected, on the other. Complicating this discussion is the suggestion that if
an accounting is ordered without a corresponding loss to the plaintiff, the
award takes on the appearance of punitive damages. Where extra deterrence is
required, it is better achieved by remedies such as exemplary damages, which
unlike account, can be tailored to the particular situation.
157
In England, a distinction is now made between contractual duties
of skill and care, and the fiduciary duties that may accompany them: Bristol
and West Building Society v. Mothew, [1996] 4 All E.R. 698 (C.A.); Armitage
v. Nurse, [1997] 2 All E.R. 705 (C.A.), per Lord Millett. This
position, now seen as “close to orthodoxy”, has been described as “the first
and essential doctrinal step in opening the way to common law control
mechanisms within equitable compensation”, inviting “the application of like
rules for gauging causation and measure of damages”: J. Getzler, “Am I My
Beneficiary’s Keeper? Fusion and Loss-Based Fiduciary Remedies”, in Equity
in Commercial Law, 239, at p. 251. Lord Millett himself has stated:
We should not integrate equity and the common law by fusing them; but
we should seek to harmonise them wherever possible. . . . There is no
justification for retaining different rules to deal with the same factual
situation, which may happen where the case falls within equity’s concurrent
jurisdiction. [Emphasis added.]
(P. Millett, “Proprietary Restitution”, in Equity in Commercial Law,
309, at p. 311)
158
In Canada, this Court in recent cases has likewise emphasized the
need for harmonizing common law and equitable remedies where the same facts
give rise to concurrent duties at equity and law. In Canson Enterprises Ltd.
v. Boughton & Co., [1991] 3 S.C.R. 534, the majority, per
La Forest J., rejected full equitable compensation in favour of the tort
measure of damages for deceit, while the dissent, per McLachlin J.,
insisted on a causal connection between the wrongdoing and the equitable
compensation awarded. This fair, flexible approach was affirmed in Hodgkinson,
per La Forest J. where compensation for breach of fiduciary duty
was awarded on a contractual basis, on the principle that the party wronged is
entitled to be put in as good a position as it would have been in had the
breach not occurred. These cases were concerned with equitable compensation,
not the equitable remedy of account. But at the very least they raise the
question whether the remedy of account, like equitable compensation, should be
harmonized with common law remedies where the facts support concurrent
equitable and legal claims. Since Monarch would have recovered nothing at
common law given the trial judge’s finding that the alleged breach caused it no
loss, the result of harmonization would be to deny Monarch the remedy of account
and disgorgement of profits.
C. Other Issues
159
My conclusion that breach of fiduciary duty resulting in a loss
to Monarch has not been established makes it unnecessary to consider the
position of Davis & Company. However, I would like to address a question
of interpretation in relation to the Partnership Act, R.S.B.C. 1996, c.
348.
160
Section 12 of the Partnership Act provides:
12 If, by any wrongful act or omission
of any partner acting in the ordinary course of the business of the firm or
with the authority of his or her partners, loss or injury is caused to any
person who is not a partner in the firm or any penalty is incurred, the firm is
liable for that loss, injury or penalty to the same extent as the partner so
acting or omitting to act.
161
I note first that in the absence of loss or injury, there can be
no claim under s. 12 against Davis. The trial judge concluded
that Monarch had not suffered any loss or injury (para. 186) and even if it had
learned of the advance tax ruling in 1998, Monarch’s position would be the same
as it is today (paras. 180 ff.). His findings stand unimpeached. This renders
academic the question of whether Davis is vicariously liable.
162
However, a few words may be apt in relation to the approach taken
by Binnie J. In considering Davis’ liability under the Partnership Act,
Binnie J. looks to the principles of vicarious liability established by this Court
in Bazley v. Curry, [1999] 2 S.C.R. 534, and subsequent cases. In my
respectful opinion, it may not be helpful or necessary to look to these
principles when considering the partnership’s liability under the Partnership
Act. In Bazley, and the other cases referred to by Binnie J., the
Court was considering when to impose, at common law, vicarious liability on
employers for the acts of employees. Here, however, the basis for vicarious
liability of the partnership for an act of a partner is contained in the
statute.
163
In determining whether Strother was acting in the ordinary course
of Davis’ business when he committed the allegedly wrongful act or omission,
the nature of the activity, and not the manner in which that activity is performed
will determine whether that activity falls within the scope of the firm’s
ordinary business. As the authors note in Lindley & Banks on Partnership
(18th ed. 2002), at p. 308, “[i]t is perfectly possible for a solicitor to
commit a fraud or other wrong in the usual course of his firm’s practice”; it
is the nature of the underlying transaction that is critical. See also R.
Burgess and G. Morse, Partnership Law and Practice (1980), at pp. 118‑19.
164
On the cross‑appeal, I agree with the Court of Appeal and
Binnie J.
IV. Conclusion
165
I would allow the appeals and restore the order of the trial
judge dismissing all claims against Strother and Davis & Company. I would
also dismiss Monarch’s cross-appeal and award Strother and Davis & Company
their costs in this Court and in the courts below.
Appeals allowed in part, McLachlin C.J. and
Bastarache, LeBel and Abella JJ. dissenting in
part. Cross‑appeal dismissed with costs.
Solicitors for the appellant/respondent Davis &
Company, a partnership: Nathanson, Schachter & Thompson, Vancouver.
Solicitors for the respondent/appellant 3464920
Canada Inc. (formerly known as Monarch Entertainment Corporation): Holmes
& King, Vancouver.
Solicitors for the appellant/respondent Robert C.
Strother, the appellants Strother Family Trust (Trust No. 1) and
University Hill Holdings Inc. (formerly known as 589918 British Columbia Ltd.)
(Company No. 1), and the respondents Partnership No. 1, Partnership
No. 2, Partnership No. 3, Partnership No. 4, Partnership
No. 5, Partnership No. 6, Partnership No. 7, Partnership
No. 8, Partnership No. 9, Partnership No. 10, Trust No. 1,
Trust No. 2, Trust No. 3, Trust No. 4, Trust No. 5, Trust
No. 6, Trust No. 7, Trust No. 8, Trust No. 9 and Trust
No. 10: Farris, Vaughan, Wills & Murphy, Vancouver.
Solicitors for the respondents J. Paul Darc,
Pacific Cascadia Capital Corporation, Sentinel Hill Entertainment Corporation,
Sentinel Hill Productions Corporation, Sentinel Hill Productions II
Corporation, Sentinel Hill Management Corporation, J. Paul Darc and Leslie
Marie Darc, Trustees of the Darc Family Trust, and the said Darc Family Trust,
Company No. 1, Company No. 2, Company No. 3, Company No. 4,
Company No. 5, Company No. 6, Company No. 7, Company No. 8,
Company No. 9 and Company No. 10: Macaulay McColl, Vancouver.
Solicitors for the respondents Sentinel Hill
Productions (1999) Corporation, Sentinel Hill 1999‑1 Master Limited
Partnership, Sentinel Hill 1999‑2 Master Limited Partnership,
Sentinel Hill 1999‑3 Master Limited Partnership, Sentinel
Hill 1999‑4 Master Limited Partnership, Sentinel Hill 1999‑5
Master Limited Partnership, Sentinel Hill 1999‑6 Master Limited
Partnership, Sentinel Hill 1998 Master Limited Partnership, Sentinel
Hill 1998‑2 Master Limited Partnership, Sentinel Hill Productions
No. 5 Limited Partnership, Sentinel Hill Productions No. 7 Limited
Partnership, Sentinel Hill 1999 Master Limited Partnership, Sentinel Hill
Ventures Corporation, Sentinel Hill Alliance Atlantis Equicap Millenium Limited
Partnership, Sentinel Hill Productions III Corporation, Sentinel Hill Alliance
Atlantis Equicap Limited Partnership and Sentinel Hill GP Corporation: Hunter
Litigation Chambers Law Corporation, Vancouver.
Solicitors for the intervener the Canadian Bar
Association: Lax O’Sullivan Scott, Toronto.